Investors see higher risk of GM default

NEW YORK Thu Jun 26, 2008 11:19pm BST

A Chevrolet Equinox Fuel Cell test vehicle is driven in Los Angeles June 10, 2008. . REUTERS/Mario Anzuoni

A Chevrolet Equinox Fuel Cell test vehicle is driven in Los Angeles June 10, 2008. .

Credit: Reuters/Mario Anzuoni

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NEW YORK (Reuters) - General Motors Corp's (GM.N) assurance on Thursday that it has sufficient liquidity did not prevent credit investors pricing in a 75 percent chance that the largest U.S. automaker would default on its debt in the next five years.

Costs to insure GM debt against default shot to a record high on Thursday and its bond prices plunged, after investment bank Goldman Sachs urged investors to sell its stock and warned that the car maker would need to raise money.

The stock slumped to a 53-year low and helped bring the Dow Jones industrial average .DJI to within a 100 points of a retracement in prices that usually is seen as a bear market.

Goldman's assertion that GM would need additional capital was particularly jarring because investors see its options for raising more funds as limited and costly in the current tight market for high-yield corporate bonds and loans.

"They need to go to market and it won't be easy," said Gimme Credit analyst Shelly Lombard. "The market is back to pricing in some bankruptcy risk."

The cost to insure GM's debt with credit default swaps rose to 33.5 percent upfront, or $3.35 million per year for five years to insure $10 million in debt, plus annual payments of 500 basis points, according to Markit.

Credit default swaps now trade above the previous highs set in 2005 when the U.S. largest automaker lost its investment grade credit rating and was cut to the junk category.

GM's benchmark 8.375 percent bond due 2033 fell more than 3.0 cents on the dollar to 60 cents, the lowest since it was sold in 2003, according to MarketAxess.

Competing car maker, Ford, saw its credit default swap spread increased to 30.5 percent upfront, plus 500 basis points annually, while Chrysler LLC went to lengths to deny rumors it was facing a cash crunch or that it has been driven to filing for Chapter 11 bankruptcy.

The credit derivatives market is now pricing in a 25 percent chance of GM defaulting within a year and 75 percent chance that it would default in 5 years, said Tim Backshall, chief credit strategist at Credit Derivatives Research.

The outlook for Ford was slightly better as investors only saw a 22 percent chance it would default in a year and 70 percent chance that it would default in the next five years, according to Backshall.

GM Chief Executive Rick Wagoner said the embattled automaker had enough liquidity to carry it through the year and had financial flexibility beyond that. For details click on

Some investors agreed with Wagoner that the company can still securitize its auto loans or get a secured loan, particularly against much stronger oversees operations, from banks if it needs new cash.

Liquidity concerns are overblown, said Mirko Mikelic, senior fixed-income analyst at Fifth Third Asset Management in Grand Rapids, Michigan. "They have a lot of assets which they can securitize," he added.

Douglas Karson, high-yield analyst at Banc of America Securities, said in a report earlier this week that GM has enough unencumbered collateral to successfully issue between $5 billion and $6 billion in secured term loan. Separately, it could issue between $1 billion to $2 billion of convertible securities.

Additional capital would be a positive catalyst for GM's bonds and credit default swaps because it would reduce liquidity risk, yet he maintained a "neutral" recommendation because of a weaker automotive outlook.

Betting against the market would be difficult because there are no signs of a quick economic turnaround or a near-term decline in oil prices that would revive demand for large cars, which are GM's main source of income, he said.

"At some point the pickup truck market will stabilize but the timing and the extent of any rebound is highly uncertain," said Mark Oline, managing director at Fitch Ratings in Chicago.

"If the current conditions do extend through 2009 that would result in a serious strain of liquidity for the three automakers."

Fitch on Wednesday cut GM's and Chrysler credit ratings deeper into junk territory and warned that it may also downgrade Ford Motors Co (F.N).

(Reporting by Anastasija Johnson)

(Additional reporting by Karen Brettell)

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