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."
ROFL dumbass, unions "remotely" involved - how stupid are you? The only knee jerk response is yours fool - remotely involved, so stupid it's incredibly funny, you actually should get post of the day for your idiocy - it also appears most on this board would disagree with your position - anyone with a brain knows the damage the UAW has caused the auto industry...ROFL
Unless removed, a parasite will usually kill its host. The same rule applies to labor unions and GM.
U forgot number 4. Retirees Pensions
You nailed it with UAW.
"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."
Worst possible solution.
You just explained why. If we focus on protecting companies like GM, in short order the whole country will be poor. how could it be otherwise when we prop up inefficient companies? We end up like France.
I give GM credit for one thing---consistancy: they do everything wrong.
Present some of the damage done by union workers that is even equal to the damage done by the sorry management of General Motors. You can't. You may play the fool and attack without any specifics but you can do nothing more than be a fool.
It's important to remember that G.M. freely entered into its labor agreements with its unions just as it recently did it a modified labor agreement adressing health care costs.
This may surprise you but I don't think you speak for most on Free Republic. Group think is anathema to conservatives. If you must practice it you may wish to head to moveon.org and get in with those who are as unable to think for themselves as you appear to be.
Keep seeking 1984 and you may find it.
No he doesn't but nor do you with your rude post #53. Disagree, but be civil.
This is the last time I'm responding to you on this issue, we'll just have to disagree about the role of unions in the demise of GM - but it has been going on since 1945. You blame GM management, I blame the unions - they have caused GM to build low quality vehicles with their wage and benefit demands. In order to stay competitive price wise, GM has no choice but to cut quality when the UAW has their foot on their neck. GM's only hope is to cut at least 250,000 jobs and eliminate at least half of the models (over 80) that they currently build. Yet, if GM tries to do that, all their plants will close due to strikes by the "brotherhood". Unions are nothing but communist and socialist fronts that have absolutely no place in a capitalistic society. You may wish to read some of the history of your beloved union here, but do not bother responding to me again - as far as I'm concerned you are on ignore.
http://www.marxists.org/history/etol/newspape/ni/vol11/no09/edcom.htm
you need to mind your own business - I didn't start this fight nor was I the first to use "rude" language - stuff it
I realize you weren't the first, that's why I pointed out post #53.
GM's preferred stock is yeilding almost 12% nowadays. I don't have the stones to buy any, as I think they will declare bankruptcy...but if you have money to lose, that's a ballsy play.
My brother works for GM. Unfortunately, the attitude of the UAW is that it's more important for the union to survive than it is for GM to survive. The union can survive without GM, and if that's the way it's got to be....
I agree that union leadership oversteps and demands unreasonable concessions from GM. But I would also offer that the SUITS contribute to the overall problem in much the same way. In my vision for a successful corperation that will last thru the ups and downs economies experience, a delicate balance must be struck in the devision of profits. This being between Labor, management, and stockholder.
Labor sees managmement taking millions upon millions and hundreds of thousands upon hundreds of thousands per "suit" and I can understand why unions would make demands for Labor's wages and benefits to be increased. This is not to say that suits shouldn't make money, but I will offer that some think labor is an underclass and thus not deserving of a fair cut of the profits they directly contribute to.
Dividends paid out on stocks held are good for investment, but again without labor their could be no profits to pay that dividend.
Personally I think all three entities need to see that they all have to work together in balance OR ELSE they all three lose.
Could it be that management needs to take a bit smaller bite of the profits in the over all solution to what GM faces today?
Could sales as they are today ( or lack of them) be partially due to the tactics of GMAC in the 90's? WHat with their 19% interest loans and such? Could it be that their service departments have grown inhospitable to customers? Could it be (as to the entire auto industry) that losing such a large chunk of value the SECOND you title it is part of the problem?
Could it be that a ten year old truck has to be kept artificially inflated in value ( ie a truck with 150 thousand miles still being "worth" 10 grand) to justify a new one being 30 grand or even 40 grand is part of the problem?
Labor management and stockholders need to see that they have to work as a team to gain sales, and thus profits, from the consumer. Working against each other and ignoring the rest will only see GM fall.
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