Posted on 11/15/2005 11:39:48 AM PST by Flavius
NEW YORK - An increasing number of investors are betting that General Motors Corp., the world's largest automaker, may be forced to seek bankruptcy protection within the next six to 12 months as it struggles to overcome slumping sales and the high cost of health care benefits for workers and retirees.
Concerns about the automaker's future are showing up in the credit default swaps market, where investors effectively buy insurance protection against defaults. Holders of GM debt who want to arrange a hedge against the risk that they won't be repaid are finding that the cost of buying the protection has risen dramatically in recent days.
"The markets are telling you that more traders are starting to see a greater risk that a default scenario could happen sooner in time than later," said John Tierney, a credit strategist at Deutsche Bank Securities in New York. "You cannot deny there is a pattern here."
GM spokesman Jerry Dubrowski responded by saying the automaker has "no plans to declare bankruptcy," and he noted that GM has about $19 billion in cash on hand. Beyond that, he declined to discuss recent pricing trends for credit default swaps. "Typically we don't comment on stock prices or bond prices," he said. "We don't think it is appropriate to do that."
At issue is the nearly $31 billion in debt related to GM automaking operations that ratings agencies already have downgraded to junk status, or below investment grade. Dubrowski said GM's total debt, including debt sold by its General Motors Acceptance Corp. unit, now stands at $276 billion.
Credit default swaps for GM are now trading at what is known as an "upfront" basis, meaning a bondholder seeking protection against a default has to pay more money up front because the Wall Street firms arranging the hedges have to pay more to protect themselves.
Michiko Whetten, a quantitative credit analyst at Nomura Securities International Inc., said GM debt had previously never traded on an upfront basis. But now that it is, it puts GM in an unenviable category with Delphi Corp. and Delta Air Lines Inc. — other companies whose debt traded on an upfront basis ahead of their petitioning for bankruptcy.
Auto parts maker Delphi, once owned by GM declared bankruptcy in October, and Delta, the nation's third largest carrier, went bankrupt in September.
GM lost nearly $4 billion in the first nine months of this year. The Detroit-based company has been hammered by high labor costs and rising prices for raw materials like steel. And while it recently reached agreement with the United Auto Workers union to temper the rise in health costs, GM still has been losing U.S. market share due to competition from healthier foreign rivals and weakened demand for sport utility vehicles, its longtime cash cows.
Wall Street's credit default swaps traders now view GM as a company so risky that a holder now must pay as much as $12 per year for every $100 of the automaker's five-year corporate debt if they want to hedge against a default, up from $8 to $9 just several weeks ago. In addition, credit default swaps traders are now demanding more of that money up front from investors looking to protect their GM holdings.
These losses may not actually occur, but the pricing moves in the swaps market are a good indication of how Wall Street traders and investors are judging the risk of a GM default.
GM Chairman and CEO Rick Wagoner said in an October interview with The Associated Press that unlike the airline industry, where some bankruptcy filings haven't had a big effect on business, even speculating about bankruptcy hurts the auto business.
"When you're buying a car it's a very different thing," Wagoner said. "It's a massive financial commitment. You expect to own it for a long time, and (bankruptcy) is something that's going to have an impact in the consumer's mind."
On Monday, GM, whose stock is trading at nearly half of its 52-week high, announced price cuts to shore up its sales. Its shares fell 40 cents, or 1.7 percent, to $23.34 in afternoon trading Tuesday on the New York Stock Exchange.
GM's outlook in the credit default swaps market took on a bleaker tone after last week's disclosure by GM that it plans to restate its earnings for recent years. GM said its 2001 earnings were overstated by approximately $300 million to $400 million, but the final amount hasn't been determined. GM plans to issue the restated earnings for 2001 and any subsequent years before it issues its 2005 annual report next year.
That triggered what is known as an inversion in the credit swaps curve — a measure of risk between short- and long-term GM debt — meaning that Wall Street traders are betting the risk of GM declaring bankruptcy is greater in the next six months to a year than over a longer period of time like five years.
In a November 10 report, Banc of America analysts reiterated a sell rating on the company's stock, saying they believe the odds GM management could be held accountable for the accounting woes has risen and this could accelerate a bankruptcy protection decision they judged to be "inevitable."
According to Deutsche Bank's Tierney, the accounting problems caught investors by surprise and "contributed to a sense that GM problems are very deep."
Just keep the dividend coming.
if there's any company that has worked its way into earning bankruptcy, it's GM.
couldn't happen to a nicer company.
GM has been heading to bankruptcy for a long time, surprised it took this long, cannot believe wall street is surprised either, it been as obvious as the nose on one's face. Can't sell cars, can't fund pension, can't afford the health care on their "legacy" employees - thank you UAW for putting an American icon out of business - another dumbass union....
"What's good for GM is good for..."
Oh, wait a minute.
No wonder that nice GMC Sierra I looked at on Sunday was so deeply discounted. List price...over $40k, my price, without any negotiating, $32k. Too bad I'm in the process of buying another house and don't want any debt to screw up the process.
All the industrial giants signed deals with the big labor unions during their glory years that they no longer can afford to pay for. Airlines, steel, automobile industry.
If GM can shed some of its union rules and constraints via bankruptcy, it will be in healthier shape.
On the other hand, that still won't change the problem that they make lousy cars. Ford and GM invented the business, but they got fat and lazy, and the Japanese have come in and cleaned their clocks.
Finally, there's a real question whether free trade is workable. Maybe we need some tarriffs, painful as it would be to restore them at this point.
http://www.gm.com/company/corp_info/global_operations/asia_pacific/chin.html
seems china is doing well
Well sure, why wouldn't they? They paid good money to have that option. And the subtext of all this is that they want to do the same with health care.
"The Detroit-based company has been hammered by high labor costs and rising prices for raw materials like steel."
The UAW is murdering GM and at the same time committing suicide.
This has to be the primary reason. Of course the taxpayers are on the hook for some of the pension obligations via a federal agency.
My 2001 GMC extended cab Sierra listed for $39,000 + and I bought it new for < $32 K. The trouble is, GM has been selling them this way for quite a while.
they could not compete with the Japanesse with compact delivery vans sot hey got the DomocRAT congress to pass import tarriffs on them. They missed every single clue about quality in cars and lived on trucks and rental cars to save them. now it is all over. turn out the lights.
Sounds to me like you're describing government unions. Did you notice how they steam rollered over Arnold Schwarzenegger a few days ago?
There are huge unfunded pension liabilities for gubbermint workers on all levels. State county Federal. The taxpayer will be bled dry to pay them until they revolt
The Domestics used to laugh at how little market share they lost, dispite of their lousy quality and marginal service. They bet the farm on big, inefficient cars making up the difference.
BTW, all this talk about Health Care costs is bunk. According to their own inflated estimates, it adds $1500 to the total cost of a car. The Japanese likely pay more in worker payroll taxes to fund their National HC plan (which usually run about 8% of payroll or more on the employee contribution alone).
California proved about two weeks ago that you can be bankrupt and still keep spending like a drunken sailor.
GM has financial problems? Just double the price of the cars! No problem.
GM deserves this...
They treat their employees like dirt.
They treat their suppliers like dirt.
They treat their customers like dirt.
They treat their business partners like dirt.
There has never been - and never will be a company in the U.S. history with a more arrogant attitude.
The market has spoken.
Honda, Toyota, Nissan - all making money !!!!
Wonder how they do it?
I wouldn't put money into China on a bet. They have a record of repeated confiscations. The most recent run by foreign companies in China has been a fairly long one, but when the time is ripe the Chinese are almost certain to confiscate everything again.
"Honda, Toyota, Nissan - all making money !!!!
Wonder how they do it?"
by doing the exactly the opposite of what GM does?
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