Corporate bond investors are bracing themselves for a possible downgrade for General Motors, one of the largest borrowers in the world, and fear its effect on the wider market.
The troubled US vehicle maker, which has $291bn of debt outstanding, is teetering on the edge of a fall to junk rating status, a move with serious repercussions for many fund managers only allowed to hold investment grade debt.
On Friday, Standard & Poor's took the unusual step of announcing it was "focusing on the appropriateness of the stable rating outlook" for GM despite reaffirming its existing BBB- status, one notch above junk.
"Normally, we would not delve into these matters in so much detail," said Scott Sprinzen at S&P. "But it's rare for so much market attention to be focused on a rating outlook so we want to be extra clear."
High-yield fund managers said S&P was signalling its intentions well ahead of time due to concern about junk bond investors' ability to absorb billions of dollars of GM debt should others be forced to sell.
Most of GM's corporate debt is issued through financial subsidiary General Motors Acceptance Corporation. GMAC had $45.9bn of US dollar corporate debt and $24.1bn of euro debt outstanding in the first week of January, according to Lehman Brothers.
"It's an awful lot of debt for the high-yield market to absorb," said Tom Parker, head of high-yield investments at Barclays Global Investors. JP Morgan estimates the total market value of the US high-yield debt market at $908bn at the end of last year.
GM itself has also begun making preparations for a rating downgrade. Last week - shortly before forecasting an unexpected drop in profits for 2005 - the company revealed that GMAC had restructured its borrowings to allow it to continue trading if its parent was reduced to junk bond status.
Eric Feldstein, chief executive of GMAC, said: "Liquidity to us is oxygen; we need it to function."
But even greater turmoil may be felt in the credit markets where vehicle makers have long been among the biggest issuers of investment-grade debt.
GMAC is already trading like a low junk-rated company. Its 10-year bonds were last week trading to yield about 285 basis points over Treasuries, similar to a B rated credit.
Companies holding BB ratings typically trade at a yield of 150bp to 200bp over Treasuries.
