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."
Thanks to the red unions, an Icon of our great country
is now going under.
Damn, I thought we won the Cold War already.
True. Check out the story about Apex Corp. in Forbes. Not pretty.
How do they do it?
They buy Japanese steel on the Japanese market...
They limit unionization wherever possible...
Their non-US wage scale is atrocious...
Their US manufacturing concerns are largely centered in the lower Mid-West and the South where labor, property, and misc materials and expenses costs are lower...
Their automation is standardized plant to plant throughout the world, something US makers cannot claim...
There are a LOT of reasons.
For what it's worth:
I am good friends with several GM employees in the Detroit area and they all speak glowingly of the company.
Another socialist experiment crapped out. Who'da thunk it.
Way back in the early `90s, when he was still working toward his black-belt in babyboomer, sharper-than-a-serpent's-tooth ingratitude, man-blimp Michael Moore tried that "General Motors sucks" schtick . . . .
The problem with the footage that wound up on the cutting room floor was that active and retired Flint, MI workers--like his own father, AC Delco--kept referring to GM by its nickname: "Generous Motors".
I agree that GM has been putting price pressure on its suppliers for years, and that is indeed unfortunate. But what frustrates me is dimbulb "consumers" who have no idea of how much our economy still depends on large manufactuers like GM, and have a conception of car quality that is 30 years out of date. The most recent JD Power survey of initial quality I saw (last July) had GM or Ford with the leading position in most automobile categories. I certainly haven't had any problems with my '99 Grand Prix with 108,000 miles on it, though reading some of the posters I've seen here, it should have fallen apart long ago.
You are exactly right. And I knew Moore was a phony when I read that, at the time he made "Roger and Me," Moore was voting with his pocketbook to create more unemployed workers in Flint--he was driving a Honda. I wonder what he drives now--probably a Lexus, BMW, or Mercedes.
Interestingly, the people who seemed to like "Roger and Me" best were all phony limousine liberals like Moore, the types who drive BMWs and vote for Kerry.
Pontiac GTO? Come on. Way too much drama for getting groceries.
Common sense says there is no possible way GM can stay in business. Recently, the GM bonds dated 2012 are trading around 70. Think about that-- bonds/notes are saying there is basically a 70% chance the company will be in business in 2012.
It took a dumbass to produce such a dumbass post.The hourly workers arent't the ones producing the concepts for the vehicles that no one wants to purchase. That falls squarely on the shoulders of the bean counters who now seek to squeeze every penny out of each vehicle no matter how it effects the performance or appearance of the vehicle.
Thank you General Motors management for ruining such a wonderful company.
I thought there might be hope for GM, until I saw the Aztek.
oh, are you some sucker that bought GM? Or are you one of those overpaid Union guys that think the company is like the government, should take care of you from cradle to grave?
The bottom line is it costs GM over $1000 per vehicle just to pay health insurance on the union scum bags that bankrupted this company........dumbass.....oh, and a big FY to you also.
I did my duty and went out and bought a 2001 Olds Intrigue on 9/29/2001.
Terrific design, very powerful engine, handled well, good mileage.
But..
Leaking sensor in the fuel tank, gas smell
radio died
radio died again
knock in the steering, lubed
knock in the steering, replaced something(half shaft?)
year later
Terrible knock in the steering, so bad I was afraid to drive it.
replaced tie-rod end.
developed another knock in the front end.
driver's electric window got intermittent, they couldn't duplicate problem
traded it in on a Honda.
This is on a 4 yr old car w/ 26k miles that spent most of its life in the garage.
My take.. good design, poor components.
BTW.. I didn't pay for any of these repairs, 5 yr. warranty. But I plan on keeping the car a long time and wanted something reliable.
I agree with 1 and 3 but not 2. I've owned a number of GM autos, including the three I have now and dollar for dollar, they're as good as any other auto.
Well, gee, if they would just come up with something better than their precious DexCool system they might sell something now and then!
I agree 200%.
Neither a sucker nor a scum you stupid s.o.b but not someone stupid enough to come up with a knee jerk response like you posted when the topic of a union is even remotely involved.
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