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CDS Flow Summary - Gap has much to prove yet; autos tank
Informa Global Markets - CDS Morning Insight (US) (January 24, 2007)

Troubled retailer Gap has much to prove though it escaped the short-term upheaval of a leverage buyout for now. The retailer replaced its leadership under Paul Pressler for interim head Robert Fisher. But to a few market participants, "interim" is the key word. An interim anything doesn't quite remove all of the worry in this retailer just yet.

Gap's troubles were also epitomized earlier in the month with the departures of the head of Gap's adult division and Old Navy and by the hiring of Goldman as adviser. Its reporting of negative same-store sales in 28 of the past 31 months led to a Fitch cut as well. These problems are not easily evaporated by a career employee at the Gap like Fisher. "It's still an LBO candidate, just not a classic candidate," notes Bob Bishop, investment grade portfolio manager at Seneca Capital Management.

Any private equity firm will likely replace all of the management at the retailer with a whole new team. But any bidder will have to bring more to the table than just their ability to manage, a turnaround will be sharply needed, notes Bishop. He expects a decision to develop about the firm's turnaround over the next six months. Gap CDS today dealt down to 131 basis points from 143/150 Monday.

The auto sector jumped inward in its own right. General Motors' shares were hit hard due to GM losing a court case against Royal & SunAlliance for USD900mln over asbestos liability. But it has hopes along with Ford Motor Co in adopting a plan to shift retiree health-care liabilities to the United Auto Workers similar to a plan by Goodyear Tire, which was behind the sharp slide in default. This helped auto leader General Motors tighten to 328 from 340/345, while GMAC remained solidly under 100 bps at 96/99. Ford Motor Co was at 468 versus 480, while Ford Motor Credit eased to 244 from 245/250.

Auto related names tightened on the auto moves. Goodyear Tire dealt at 187 from 192. Trade occurred in ArvinMeritor down to 270 from 280 and in Lear down to 305 from 325. There was also a convertible bond rumor for GM which was bandied in the market, though it had more of an impact on its shares than on its default. Elsewhere, fourth quarter net income increased 47% at BoA to USD5.26bln, or USD1.16 a share, while profit at Wachovia was up 35% to USD2.3bln. CDS in both were steady at 8/10 and 11/13, respectively.

Kathleen Fitzpatrick Hoffelder



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