Credit default swaps on General Motors and Ford Motor reached their highest levels ever as speculation about a bankruptcy filing from GM increased last week. GM's credit default swaps jumped 219 basis points to 1207, while Ford's CDS widened 100 basis points to trade at 910, according to Markit. The turmoil surrounding GM's credit also caused the CDS of several auto suppliers to widen considerably.
GM was dealt a blow last week when the United Auto Workers rejected a wage cut package that auto supplier Delphi provided the union. The lack of union concessions is making a strike by Delphi workers more likely. A strike would cause serious disruption to production at GM's factories, hurting the already beleaguered auto giant. GM's credit default swaps were trading at a mere 200 basis points at the beginning of the year. "It is now seen as realistic that GM will file for Chapter 11," said Gavan Nolan, credit analyst at Markit. "Before it was a wacky idea, but now it is realistic." A spokesman for GM said, "We've said on numerous occasions that we have no plans to file for bankruptcy."
Because GM's credit default swaps are trading above 1000 basis points, sellers of protection can demand premium upfront rather than on a quarterly basis. GM's credit default swaps traded above 1000 when it was downgraded to junk status by the rating agencies earlier this year, but they traded below 1000 basis points soon after. Last week was the first time that they traded above 1000 basis points since the downgrades.
Problems at GM have had a knock-on effect on the rest of the U.S auto industry. Edwin Wiest, v.p and senior analyst at Moody's Investors Service, said the problems at GM negatively affect auto suppliers because many rely on the big three auto makers GM, Ford and Daimler Chrysler for 30-40% of their business.
A potential strike at Delphi could hamper the proposed sale of GM's finance subsidiary, General Motors Acceptance Corporation, causing GMAC's CDS to widen 50 basis points to trade at 455, said a trader. American Axle & Manufacturing Holdings, which relies on GM for 78% of its revenues, has seen its spreads widen 150 basis points in the past two weeks. American Axle's credit default swaps are trading at 650 basis points, according to a trader. The spreads on Lear Corporation, another large auto supplier to GM, widened 200 basis points to 775 basis points. Auto supplier Visteon Corp.'s credit default swaps traded at 803, up 165 basis points on the prior week. The credit default swaps of Dana Corp., which have almost reached the 1000 basis points benchmark, are trading at 950 basis points. In October, they reached 1000 basis points when the company said it was restating its 2002, 2003 and 2004 financial statements and its financial results for 2000 and 2001.
