General Motors' bank debt and bonds traded down after Delphi, its largest customer, filed for bankruptcy. Its revolving credit fell six points to 90, while its '33 bonds were down seven points to 71. Its debt fell on concerns that General Motors could also be heading for bankruptcy. The auto maker faces the same high labor cost structure and falling sale revenues as Delphi and bankruptcy concerns were fueled by comments made by Steve Miller, Delphi ceo, that a collapse of Delphi could deal a fatal blow to General Motors.
Apart from large pension liabilities, General Motors is also facing a drop in its sales revenues. "It has issues on every front," said Walter Morales, chief investment officer of Commonwealth Advisors. "A few months ago everyone thought that GM could restructure without bankruptcy. The feeling is that this is less so today."
Investors' concerns that the company could be heading for bankruptcy has caused the yield on GM's credit default swaps to shoot up. The credit default swaps were at 780 basis points before Delphi's filing. Now they are more than 1000 basis points.
Morales said he does not think GM is a good investment because of the uncertainty over its pension liabilities that it may be on the hook for as well as other problems. "Absent the labor costs, investing in the company is like catching a falling knife because of the non-labor costs," said Morales.
He sees investment opportunities in GMAC, GM's finance subsidiary, however. He said that GMAC is a more solid credit rating than rating agencies have assigned it. "An investment in GMAC is sound. The asset coverage at GMAC is enough to cover the debt, even at the unsecured level."