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Automotive sector: Technically tight but fundamentally flawed?

In the global automotive sector over the past three months, investors have focused on the problems facing GM and Ford.

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With liabilities of nearly $80 billion at GM, capital has been diverted from the business of making cars at a time when Japanese companies Toyota and Honda are investing in new plants in the US South. Money has been flowing out of bonds in GM and GMAC, leaving credit spreads on paper maturing in 2009 as wide as 205 basis points over benchmark. This has pushed spreads on similarly dated Ford paper to 189bp.

Real-money investors fleeing US names have been looking to Germany, and VW, BMW and the global DaimlerChrysler.

Of these, BMW has the strongest credit profile, though it is such a small issuer that Standard and Poor's does not rate it. As Christophe Boulanger, automotive credit analyst at Dresdner Kleinwort Wasserstein, says: "Real money investors have been increasing exposure to VW and DaimlerChrysler since the beginning of the year, which enabled their 2011 bonds to tighten by around 25p and 15bp respectively."

Are investors making a good value bet? The 2005 outlook for GM is now stable at BBB– from S&P, which has the same rating and outlook for Ford and Ford Motor Credit.

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