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GM bankruptcy fears rising on Wall Street
(AP)
Updated: 2005-11-16 09:23
An increasing number of investors are betting that General Motors Corp. may
be forced to seek bankruptcy protection within the next 12 months as it
struggles with slumping sales and high health care costs for workers and
retirees.
Concerns about the future of the world's largest automaker 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.
General Motors
Corp. chairman Rick Wagoner is seen here in October 2005.
[AFP] | "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 $1.13, or 4.76
percent, to close at $22.61 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."
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