Credit Suisse First Boston is warning investors that some structured finance bonds backed by General Motors loans to dealers are more correlated to the performance of the company itself than they might appear. The loans, known as dealer floorplans, are made to individual dealers and theoretically bondholders are only exposed to a diverse pool of underlying borrowers. But because of an array of incentive plans offered by GM, which may include guarantees to repurchase inventory or commit capital to dealers, CSFB says the degree of separation between GM and the assets is actually very low compared to other asset classes--and auto loans in general.
As a result of this increased correlation relative to other assets classes, CSFB's analysts, led by Rod Dubitsky, managing director and group head, are recommending avoid GM's dealer floorplan ABS for the time being. Instead, investors should park cash into General Motors Acceptance Corp. auto loan bonds, which although are trading richer than the floorplan bonds, the auto loan bonds have less sensitivity to the ongoing troubles at GM. "ABS investors may be better off waiting for a more opportune time to pick up GM's floorplan paper," CSFB said in a report to investors last week.