29 March 2006

Credit investors ponder GM-sized hole in universe

Reuters Business Channel | Reuters.com: "LONDON (Reuters) - Like the elephant in the living room, the decline of General Motors is a problem that investors don't want to think about but can't ignore.
The world's largest automaker, whose debt is close to the gross domestic product (GDP) of Belgium, lost more than $10 billion last year and is facing a bankruptcy that would reap devastation in the financial markets.
GM's share price has halved in the past year, while its $100 billion of bonds have been cut to junk, confronting investors with the prospect of never getting their money back. Others in the highly-leveraged derivatives market face incalculable losses should a bankruptcy occur.
'A GM default would be absolutely huge,' said Jonathan Loredo, of credit manager Cairn Capital. 'It would be the biggest thing to hit the market in terms of losses and operational stress.'
There is no understating the scale of GM's problems. It is losing market share in the United States, has $300 billion of long-term debt, provides health benefits to 1.1 million people (at the rate of about $1,500 per car produced), is threatened with a strike by its largest supplier, which is bankrupt, and is being investigated by the Securities and Exchange Commission.
Few who invest do not have some level of exposure -- GM stock and debt is held by the biggest investment banks and smallest retail buyers.
GM, or its financing arm GMAC, is present in around 65 percent of synthetic collateralized debt obligations (CDOs), according to Standard & Poor's, and underlies an estimated $1 trillion of default swaps.
The company's impact is evidenced by the CDX credit default swap indices. The U.S.-based CDX4 equity tranche"

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