What Is Spooking Auto Supplier CDS?

Or maybe the correct question is "what wasn't" especially for the past 3 months... I touched earlier upon the pain that is still to be unleashed upon the autosuppliers when I discussed the Visteon CDS auction. However, it seems the credit market is already on top of this. A brief observation of the CDS (and to an extent the equity) levels of TRW and American Axle indicates that over the past week something has really spooked longs in the names. While TRW CDS has almost doubled from just under 700 bps to 1,100 bps (in running spread), the CDS of American Axle has simply exploded from under 3,000 bps (what is that in pts up: about 50?) to over 5,000 bps in spread (mid 60's). At the same time equities seem to maintain option value in case the Administration changes its mind once again, and this time Obama decided to actually provide the $10 billion in bailout capitla requested. Of course, absent even the glimmer of bailout capital hope, the CDS on both names would promptly hit the stratosphere while equities would get pummeled. And once the auto supplier dominoes start falling, then start looking for the real secondary derivatives: which companies will be next in line as a result of the D-3 bankruptcies?

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Auto Supplier Shock Spreading, Now TRW

Last week it was Visteon, yesterday it was Lear, today it's TRW. The auto supplier whose secured credit facility has been on an unprecedented tear recently, filed an 8-K earlier announcing it will likely breach covenants, and not some time in 2013 (the same year the S&P is using for its fwd multiple calculation), but Q2! In other words, they have a mere 30 days before TRW will be the next auto supplier casualty. It is interesting that TRW management waited so long, before a) announcing just how bad things are and b) taking proactive steps to fix things. From the 8-K:

On June 2, 2009, TRW Automotive Holdings Corp. (the “Company”) announced that it has initiated the process with its bank group to amend its primary credit facility. In light of the current industry conditions, it is unlikely that the Company will be in compliance with the financial covenants of its existing credit facility at the end of the second quarter of 2009 and, therefore, is seeking to amend certain terms of its primary credit agreement to position the Company for future covenant compliance through the current downturn. The Company expects to complete the amendment process prior to the end of the second quarter 2009.

Recently TRW said it had fully drawn down its revolver, with utilization now sitting at $1.3 billion. The credit facility is $2.5 billion in total, underwritten by upgrade specialists Merrill Lynch/BofA and JPM. It will be interesting to see if the Merrill auto equities team takes a page out of the REIT book, and upgrades TRW equity to "Once In A Lifetime Dodecatuple Super Strong Buy", with a $100 price target, generating a short squeeze, doing a follow on, pocketing 10% of the equity offering and having management use the proceeds to pay down its credit facility. Stranger things have been seen in the market recently. Sphere: Related Content

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