Credit Markets Update: Fiat sees curve invert

The cost of credit protection on Italian car manufacturer Fiat widened 140-150 basis points today, after rating agency Standard and Poor’s put the company on credit watch.

Automotive analysts at Commerzbank in London said they expect both S&P and Moody’s to conclude rating reviews over the next week, with Baa3/negative a likely outcome for Moody’s.

Fiat five-year protection traded at 370bp/420bp today as its credit default swap curve inverted - with one-year swaps trading at bids of 450bp. “Further down the curve there are strong bids for protection on convertible bonds,” said Matthew Johnson, a credit derivatives trader at ING in London. “We’ve seen aggressive bids at 400bp.”

Apart from Fiat, autos were relatively well bid in Europe, according to traders in London. The upgrade of Nissan Motors to BBB- had no credit implications for Nissan or Renault, in which it holds a 44.4% stake. One London trader said the anticipated upgrade was priced into the market, limiting any potential upside. Spreads on the autos were already reasonably tight and Renault’s five-year protection held at 85bp-mid.

The decison by Moody’s Investors Service to cut telecommunications firm WorldCom's credit rating to sub-investment grade - or 'junk' - yesterday, initially pushed spreads on debt protection for US telcos AT&T and Sprint 60bp wider to 400/450bp. But this widening was completely reversed during trading today, dealers said.