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NEW YORK - 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.
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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.

"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."

Curb Zone

 

The Emperor

Hmm, what to say, sucks to be them in these days...

Imhotep Evil

Yeah, but their not alone, Ford also has problems, so does Fiat, VW AG and DC AG also have their fair amount of problems, as does Mitsubishi.

Yannis

GM is bankrupting?

I hope Ford is next followed by Peugeot, Renault , Citroen and FIAT/Alfa Romeo...

Merc1

Why would you want this to happen? The whole industry is hurt by this one way or another.

M

p373r7r4n

this wouldnt have to happen if they stop building so many SUV's and some better cars!

Snake Vargas

I'm not sure their problems are entirely product related, though it could be.

I can't say I'm particularly saddened, for my part. However, like Merc1, I believe this will hurt the entire industry. It hurts the parts suppliers, which goes on to hurt the other car makers.

Yannis

You can blame the huge discounts they are giving to new cars for the bad results. They had that employ discount in US which must cost them billions.

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I hope they bunkrupt before they take other companies down with them. The discounts are hurting themselves and rival companies also.

p373r7r4n

they were expecting huge loses with the discount... they were hoping that the discount would create future loyal customers

looks like the loses came way too fast because they sold so dam much at such low prices

warot

Well their lineups are like 50 percent SUVs and 50 percent average cars... they had to do something. The discounts made the sales go up, although they lost money. Trust me, if thye go down, theres nothing be dancing about. I'm positive it'll hurt the German cars one way or another.

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