US CREDIT-GM bond, CDS values depend on form of intervention

NEW YORK, Nov 15, 2008 (Reuters via COMTEX) -- GM | Quote | Chart | News | PowerRating -- Legislation aimed at propping up ailing automakers including General Motors Corp may support the company's bonds and credit default swaps (CDS), if passed.

If government intervention trips payments on the company's CDS, or forces an unexpected overhaul of GM's debt, however, it could create new turmoil in credit markets.

The U.S. Senate is due to debate a $25 billion bill to bail out distressed domestic auto companies on Monday, but it is unclear if proponents can muster the necessary support for a yes vote. For details, see

GM has said it does not consider bankruptcy to be an option, but also warned it may run below the minimum amount of money needed to operate its business in 2009.

"The federal government may need to put some money into GM, and in turn Delphi, before year end just to stabilize the situation until a comprehensive solution can be reached," said Kirk Ludtke, senior vice president at CRT Capital Group in Stamford, Connecticut.

Auto parts supplier Delphi Corp was formerly owned by GM and won support from GM after it went into bankruptcy in 2005.

A direct loan to GM would be unlikely to trip payments on the CDS, analysts said. Liquidity provided from the action could also be supportive of auto company bonds and swaps.

"The federal government is working hard to minimize systemic risk, so it seems logical that they will make every effort to restructure GM and GMAC without triggering the CDS contracts at either company," Ludtke said.

Finance company GMAC is 49 percent-owned by GM, with the balance owned by Cerberus Capital Management LP.

A different form of intervention or a massive overhaul of the companies' debt loads, however, could trip payments in credit default swaps, and the severity of any such act could be negative for markets.

"If CDS is triggered and debt is forced to be exchanged into equity, we believe the credit market would be thrown into turmoil," JPMorgan analysts Eric Selle and Atiba Edwards said in a report on Friday.

"We view this option as remote due to the complexity and risk to the health of a teetering credit market," they added. "However, credit investors should be prepared for this option."

Terms in credit default swaps that insure GM's debt specify that payments on the contracts can be triggered by a restructuring, in addition to a default.

"We also see risk to a smooth restructuring as recent examples (Lehman bankruptcy) have had wide-ranging, unintended consequences," JPMorgan said.

Nonetheless the bank rates GM's debt a "buy," arguing that the company has several sources of liquidity and that government funding will help sustain it.

CRT's Ludtke argues, however, that longer-term threats to the company's solvency remain even if it achieves a short term funding boost.

"At this point, GM's structural issues may be too much to resolve without extraordinary measures," Ludtke said. "We believe that GM may need to go through a 'bankruptcy-like' process in order to right itself."

If GM were to file it could send markets lower across the board. The majority of losses on its bonds and CDS, however, have likely already been taken.

DISTRESSED PRICES

"Obviously there's little optimism priced in at current CDS levels," said Simon Moore, credit strategist at Credit Suisse in New York. "Spreads would imply it's really a question of when they file or restructure, though government actions and possible mergers are a wildcard."

It costs around $7.2 million to insure $10 million of GM's debt for five years, in addition to annual payments of $500,000, based on prices by Markit Intraday.

Net volumes of $3.4 billion are outstanding on GM's swaps, according to data by the Depository Trust and Clearing Corp (DTCC). GM has $32.45 billion in outstanding long term debt.

"If GM defaulted, CDS contracts would likely recover in the mid-teens, based on where its recovery swaps are trading," said Moore.

If the CDS recovered 15 cents on the dollar, for example, total payments on the contracts would be around $2.9 billion, based on the DTCC data. These losses are unlikely to be concentrated, and are largely baked into their price.

Moore views equity markets as more likely to be affected by any GM failure.

"I think it would be more of an equity story than a credit one, in terms of sentiment," he said. "Credit markets have priced in the likelihood of a GM default for a long time, so it would be unlikely to move the corporate market much if at all." (Editing by Leslie Adler) For other related fixed-income quotations, stories and guides to Reuters pages, please double click on the symbol: U.S. corporate bond price quotations... U.S. credit default swap column........ U.S. credit default swap news.......... European corporate bond market report.. European corporate bond market report.. Credit default swap guide..............

Fixed income guide..................... U.S. swap spreads report............... U.S. Treasury market report............ U.S. Treasury outlook.................. U.S. municipal bond market report...... Keywords: MARKETS CREDIT

(karen.brettell@thomsonreuters.com; +1 646 223 6274; Reuters Messaging: karen.brettell.reuters.com@reuters.net )

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