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."
Nonsense. My Dad is a GM retiree after 40 years of working as an engineer. He always got a healthy salary and excellent benefits. In fact, good benefits have been a hallmark of GM for years.
>>>>>>Honda, Toyota, Nissan - all making money !!!!
>>>>>>>Wonder how they do it?
In part because they aren't being retirement benefits to Americans, like my Father.
Good point about the private sector paying for unrealistic union concessions by big companies when they declare bankruptcy. We don't participate in the negotiations, vote for the union pandering politicians but may "buy American" and we end up paying. What a country!
40 years - your father should be proud of that - for sure.
How many people today and speak of such dedication and loyalty - I tip my hat to him.
> They treat their employees like dirt.
BS. They pay 60% more than the national average. That is not dirt.
Yes, he is. And he wouldn't take kindly to people cheering for the bankruptcy of the company he worked so long for. With all its problems, lots of Americans depend for their livelihood on GM, and no one should be happy about its financial problems.
Quicker the better, end the misery of this sick shell of a one time great business.
I'm not happy - trust me - GM is currently 120 days
late with payment equal to $600k for my business.
With less than 100 employees - I am happy about anything.
I am however ready to see the 'Market' put GM into a position where this massive mess has to be restructured.
One employee does not make an accurate picture.
Yesterday is history - today is reality.
The Dow juked south at the same time this article hit the wires. Coincidence?
I live in California and witnessed them using the power of their hundreds of millions of dollars to 1000% outspend the Governor on the propositions.
They went so far as to also borrow, so if the GOP has any brains what so ever, they should again put a bunch of similar propositions on the ballot in 2006. They can't keep that kind of spending up and are starting from less than zero being they have loans to pay off.
When EXACTL did the airlines pay good money, and to whom to have an option of making the general public pay for their private union pensions? I don't get that at all.
I find that hard to believe. They are funding their employees' health care to the tune of several BILLION dollars, not to mention the high wages they are receiving.
And I thought Ford with all its debt would be the first.
Who's going to keep all those millionaire doctors in their lavish lifestyles if General Motors goes under? GM's the money tree of all money trees for the AMA...
Bought and paid for from the politicians who write the bankruptcy laws allowing them to dump financial liabilities on to the taxpayer in the firs place.
Where are such laws?
They really automatically exist like that?
WOW!
So if part of the private sector crashes, instead of allowing it to fail they instead get to act like an anchor to take us all down with them? DANG!
who says they make terrible cars ?!?!
the corvette is an amazing sports car, and the z06 version of the new vette will go toe to toe with the supercars of europe.. out perform at 25% the cost.
GM always has been good about offering the most power in their respective classes.
the GTO being an australian born performance luxury car, shipped over from the Holden car company in aussie, stickered with pontiac badges, and is priced under what the BMW m3 is, and out performs it on every aspect.
GM does have the better cars ... but i think their lack of advertising is its demise.
Only if that part of the private sector has contributed sufficient campaign funds, like the airlines and auto industry do.
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