Market concern that a possible strike at Delphi Corp. could scupper General Motors' sale of a 51% stake in General Motors Acceptance Corp. to Cerberus Capital Management caused credit default swap protection on GM and GMAC to widen last week. GMAC's five-year credit default swaps widened 80 basis points to 380. GMAC's CDS were trading at 420 on March 30 and fell to a low of 300 on April 3 the day of the announced sale according to GFI Group. GM's five-year CDS widened to 20.25+500 from 16.5+500. Ford Motor Co.'s five-year CDS also widened 80 basis points to 940, while Ford Motor Credit's five-year CDS widened 80 basis points to 500.
"People feel there is a real risk the deal will not get done," said a trader. "If there is a strike of more than a couple of weeks, it could really hurt GM's liquidity position and its auto suppliers." GM's 8% '33 bonds were down four points to 71, while GMAC's 8% '31 bonds fell three points to 93. Spokespeople at GM and GMAC were not available for comment.
The market is concerned that the sale will not be completed because of a clause in the deal that allows Cerberus to walk away from the transaction if GM's ratings fall below CCC before the deal is expected to close in the fourth quarter of 2006. GM is rated B3 by Moody's Investors Service and B by Standard & Poor's. Analysts said a protracted strike at Delphi could plunge GM into bankruptcy because Delphi is a large supplier to GM. "GM could bleed $100 million a day in cash if there is a strike," said Kip Penniman, credit analyst at KDP Investment Advisors. If the deal goes through, however, analysts see upside for both GM and GMAC bonds. Penniman estimates that GM's long-term notes could increase 10 points if the sale goes through and Delphi avoids a strike with its union. He also sees a potential 10 point increase for GMAC's bonds.
Al Alaimo, portfolio manager and director of research at Seneca Capital, said a sale of GMAC would be positive for its liquidity. Seneca Capital invests in GMAC bonds. Alaimo pointed out that the company will have a new $25 billion credit facility with a group of banks led by Citigroup, boosting its liquidity position. "If the deal closes and the ratings agencies affirm a high BB rating, the bonds would probably trade at least 100 basis points tighter," said Alaimo.