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Heightened Worries For GM, Ford, Chrysler
GM credit default swaps spreads today exceed September 2005 levels when they were at 1,400 basis points.
June 30, 2008
Credit default swaps, a market on Wall Street where corporate debt investors can buy protection against default, continue to take a harsher look at Chrysler, Ford and GM amid ongoing signs of a slowing economy and rapid gains in oil prices that are sapping demand for their products.
For example, credit default swaps for five-year GM debt early on Monday were at about 1,950 basis points. Also, investors buying protection for five-year corporate debt from GM can expect to pay 32-1/2 points up front as well as a 500 basis point fee. That means buying insurance against default for $10 million worth of GM debt will require that investors pay $3.2 million up front and 500 basis points, ir $500,000, on an ongoing basis.
Ford CDS, meanwhile, are trading sat 1,400 basis points and require a 29-1/2 basis point up-front payment.
GM credit default swaps spreads today exceed September 2005 levels when they were at 1,400 basis points.
Judging by these higher insurance costs, the implied default rate this point for Ford is 70% over a five-year period and 80% for GM, according to one market observer who declined to be named.
In addition to rising energy costs that cool demand for its autos and trucks, GM has been hobbled by costs related to its money-losing finance business, GMAC.
GMAC has been hurt by a drop in mortgage lending as well as rising costs tied to an increased number problem loans.
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