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."

http://news.yahoo.com/s/ap/20051115/...nkruptcy_fears

 

Whether GM declares bankruptcy or not, they must start building more appealing cars....... immediately. In fact, every new model they release from here on out must be as good or better than Japan or Germany. They must start beating Japan at it's own game of near perfect reliability with minimal/zero recalls, and improve fuel economy accross the entire board. They must start beating Germany at it's own game of outstanding handling and performance. GM must make safety features such as side and full curtain airbags and 4 wheel ABS standard on every model WITHOUT raising the sticker price. That's the only way the company will survive in the long run.

These are the basic points which drive sales and profits with every successfull manufacturer, no matter where they are headquartered. GM is severely behind the times in those aspects, and bankruptcy or not, those are the keys they must focus on completely.

 

I would argue they have been doing this relatively well. The Pontiac G6, Solstice, Saturn Sky, Chevy Aveo. Buick Lucerne is definately a strong Lexus ES fighter and the plans to turn Saturn into Opel's US operation is a solid one.

GM's problem isn't building cars that can compete. It also isn't an issue of quality, as Chevy, Cadillac, and Buick regularly trump Toyota in the IQS. GM's problem is a bad reputation among consumers. We have a huge segment of the population that has been brainwashed into this "Toyota, Honda, or Nothing" mentality.

Honda and Toyota can keep milking these same tired cars, don't really even try, and they fly off the lots while GM (and Ford) need to take a page from Chrysler's playbook and make American cars. Right now, they're competing with a bunch of really well made Japanese clones.

Step into a European car, you know you're in a European car. Step into a Japanese car, you know you're in a Japanese car. GM and Ford need to rediscover what the American car is. It's not a tight handling GT built for autobahn speeds or a small and efficient gadget-and-gizmo-mobile with 40 cupholders. Strong and imposing design, big on power, comfortable and roomy. It's what they've been doing all along with their SUVs but never thought to do with their cars.

 

OMG - people aren't brainwashed... could it be that some people just learn from their mistakes? Like when you buy a GM, you're sure to make many new friends @ the repair shop, and that's even before the warranty runs out.

 

They still use pushrod engines and 4 speed automatic transmissions when every global competitor has gone OHC and at least 5 gears behind the flywheel.

If GM is to rediscover the American car, they still need to improve quality (I don't give a hoot about initial quality.... every new car has good initial quality since it hasn't been driven much... a 1987 Yugo had great "initial" quality - untill you drove it for a week), advance their safety features, and improve fuel economy. You can say all you want about people being brainwashed into Honda this and Toyota that, but even their most powerfull vehicles are carefull on the dinosaur bones.

If the Pontiac Grand Prix could trim some fat, add another gear, and trade the 3800 for an OHC engine with more hp and better fuel economy, but still keep the Pontiac look, would that be a bad thing?

 

ha that doesnt sound too good..

 

Compared to???

Saturn what???

HAHAHAHA, it doesn't hold a candle to the ES, not even to last gen Avalon, never mind, not even to first gen Avalon. I got sales numbers to prove that


GM earned their reputation

They do not have a quality "bread & butter" vehicle that could compare to Accord, Camry, Atima, Civic or Corolla. The Malibu and Impala are such failtures, it's not even funny.


No, the era of American Cars is over, nobody wants mushy slushy cars with king size coach for a drivers seat. People want refined cars, and unfortunately, besides the Corvette, there is not a single refined American car. And even the Corvette must do away with the pushrod.

 

And that's where the reputation rebuilding comes in. GM has vastly improved and continues to improve the quality of their vehicles but long term reliability takes time.

You can argue engine technology, transmission speeds, fuel economy, whatever new industry flavor of the month. I don't see the value of GM attempting to copy others. Yes, there are things GM has to do. You listed them so angrily in your first post. But, if GM were to do that - exceed Japanese quality, exceed European handling, brand new engines modern engines across the board, standard safety equipment at no extra charge, etc... how many people in the import camp would truly, legitimately consider GM? A good chunk of people would probably give the issue lip service and say yes but really it's still no. This goes back to the poor reputation and this would most likely push them faster towards bankruptcy.

And in the end, this may be no win. It has improved IQS across the board (which is the first step towards longer term reliability). It has turned the Cadillac division around with desirable products and cut loose Oldsmobile. It's making the safety push. And there's more GM needs to do, but in the short term, they've got to find their "300C/Magnum/Charger", something built with the older existing technology, something that doesn't necessarily compete that well but has captured the public attention and has enough good traits to hold onto these consumers when improved future products come out.

What GM can't do is just copy the competition. GM is a sinking ship, burdened with UAW contracts, pensions, health care costs. It doesn't need to be said that it would cost GM significantly more than any other automaker to build the same car. Investing in R&D is something they need to do for long term growth, but right now it's more important to take steps towards short term survival.

Attitudes like this:

don't do anything, because they essentially take the attitude that GM is screwed and there is nothing they can do to win back consumers.

In the end, I think this is a difference of opinion. I do agree with the fact that GM has a lot of things it needs to focus on and everything you (fastball) have said is valid. I just don't think GM has the time or the resources right now to let that pan out. They need a short term survival solution (a la Chrysler 300C) before focusing on longer term growth. And I think the only way they can do that is by building an American car (wholly American in feel that appeals to a broad American base) versus copying the Japanese/Europeans.

 

Missing the entire point. It's not about the sales numbers, it's about whether it competes well with the competition in features, in quality, etc... I doubt you're going to argue that no other truck in America holds a candle to the F-Series.

Also, I believe Impala is one of the best selling midsize sedans on the market.

And I believe Chrysler would disagree with you that nobody wants American cars. The market is there, just no one has catered to them for too long.

 

Bleh, the new GM vehicles are only an improvement insofar as they're less crappy than the heaps of junk they're replacing.

The american automotive press has been a little too ready to be complimentary of american cars that they've been a bit too kind.

Case in point, the new Cadillacs. A couple years back I happened to ride in a DeVille and thought, hey the ventilated seats are nice, but the plastic in here is of worse quality than a Corolla or Civic. After reading article after article about how the new Caddys were so much better than old ones, I was thinking they'd be pretty damn nice.

Then a ladyfriend of mine got a job at a Cadillac/Hummer dealer here. After work one day I stopped by to say hi and just checked out a coupla cars sitting in the showroom while I was waiting for her to finish up with a customer. The interiors as a whole were sub par. The CTS is second-rate among regular midsized cars like the Accord, Camry, even Mazda6. The STS doesn't come close to most entry lux cars in the low-mid 30s. The Escalade is nice enough if you disregard the blocky design that looks like it's fresh out of mom's 1984 Vista Cruiser. The new DTS wasn't out yet so the DeVille was still an "old" Caddy and thus appropriately crappy. The XLR was alright but certainly not up to the level of stuff costing tens of thousands less.

Now sure, these interiors weren't bad per se, but after all the hyperbole in the american automotive press about how Caddy had been all turned around I was at least expecting them to be up to par with the competition. No way. And if you read about the new Caddys in say, a British magazine, they're straight up about how the interiors aren't that great. Of course they have their own biases about British cars but that's another issue.

The point here is that GM's supposedly best new lineup is still pretty bad. Yes their new products are a step up from the steaming piles of crap they had been trying to hock at dealerships, and yes that is a step in the right direction, but they still have a great distance to go before their cars are truly up to par with the competiton.