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CREDIT COMMENTARY
Jul 19, 2013
Detroit files for bankruptcy
Detroit filed the largest municipal bankruptcy in US history on Thursday, forcing the city's creditors into negotiations to resolve an estimated $18.5bn in debt that has crippled Michigan's largest city.
Both General Motors and Ford have emerged successfully from the financial crisis and filing for Chapter 9 bankruptcy could be the right medicine for Detroit to follow suit. CDS contracts on Ford are currently trading at 150bps after trading at severely distressed levels in 2009, prior to going through a long and painful restructuring process.
Meanwhile General Motors is currently trading at 200bps after being relieved of its debt in 2009 through a US state backed bankruptcy.
The record closing highs for US stocks yesterday failed to filter through to Asia this morning with Japan witnessing a wild day of trading prior to Sunday's elections. The Nikkei ended marginally down after seeing variances of more than 500 points as investors position themselves prior to Sunday's upper house elections.
With Prime Minister Shinzo Abe's LDP government expected to win the majority of seats, it is likely that tough structural reforms will be implemented in the near future. CDS spreads on Japan were however unfazed, trading flat from yesterday at 63bps.
CDS spreads on the United States on the other hand were seen trading tighter today at 23bps after Moody's changed the credit outlook to stable, last night. Moody's assigned a negative outlook to the US in 2011.
Tech heavyweights Microsoft and Google are having a though day in the markets today as revenue growth for both companies came in below forecasts in last night's quarterly reports. Microsoft shares fell more than 9% as revenues rose 10% to $19.9bn, nearly $1bn below forecasts - mostly due to a $900m write-down on its Surface tablets.
CDS spreads on Microsoft, however, tightened by 4bps to 35bps as the market confirmed its confidence in Microsoft's core revenue streams. Microsoft's business division, which includes its Office applications, grew 14% over the reporting period.
Market bellwethers General Electric and Vodafone released quarterly earnings today. GE beat quarterly profit expectations by a penny at 36 cents a share, while Vodafone underperformed due to lacklustre numbers coming in from Europe. Vodafone revenues fell by 3.5% for the quarter, however CDS spreads remained flat today at 83bps.
The Markit iTraxx Europe index is trading 1bp tighter at 101bps and the Markit CDX.NA.IG index 0.4bps tighter at 73.8bps.
Frans Scheepers, CFA
Vice President
Markit
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