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GM Woes Raising Others' Cost of Capital

Last week, as investors fled to much-safer Treasuries, the bond market recorded its biggest weekly drop since August 2003.
Stephen Taub, CFO.com | US
March 22, 2005

If corporations see their cost of borrowing increase in the near future, they might agree that General Motors is partly to blame.

Last week the world's largest automaker — and the third-largest borrower in the much-followed Lehman Credit Index, with about $45.7 billion of debt — delivered an earnings warning that spooked the bond market. As investors fled to much-safer Treasuries, the bond market recorded its biggest weekly drop since August 2003, according to Bloomberg.

The spread between Treasuries and investment-grade corporate bonds widened by 5 basis points, from 79 — its narrowest gulf since 1998, according to the wire service, citing Merrill Lynch — to 84. Junk bonds fared even worse, as their yield spreads widened an average of 25 basis points, to 298.

As a result of the bond market sell-off, reported Bloomberg, one company that could see its borrowing costs rise immediately is DirecTV, which plans to sell $500 million of notes this week. The company is rated several notches below investment grade, depending upon the rating agency. Morgan Stanley has $11.5 billion of debt maturing this year, and it is poised to pay a higher coupon when it refinances this debt. (The bank's own analysts believe that the reaction to GM's plight is wildly overdone, notes Ron Fink, moderator of the CFO Blog.)

What's more, GM's bad news caused several companies to delay bond offerings, said James Probert of Bank of America Corp. according to Bloomberg. "We had a handful of people who decided they wanted to see a better environment, he told the wire service, adding that things might turn around as soon as next week.

Still, the environment is not exactly gloomy for potential borrowers. Bloomberg pointed out that the average yield on A-rated debt at the end of last week was 5.62 percent, well below the average of 6.83 percent over the past five years, according to Moody's data.




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