GMs derivatives show rising bets on bankruptcy

Nov 14 | Updated: Nov 15 2005, 08:01am hrs
Derivatives traders are increasing bets that General Motors Corp may follow Delphi Corp and Delta Air Lines Inc into bankruptcy after the disclosure of accounting errors and four straight quarters of losses.

Traders last week demanded upfront payments in addition to annual premiums for derivatives contracts that protect owners of the Detroit-based companys debt should it miss a payment or declare bankruptcy. By doing so, traders relegated GM to the same status as Delphi and Delta just before those companies defaulted.

GM, the worlds biggest automaker, is losing US market share to Asian rivals such as Toyota Motor Corp and is in the midst of its longest stretch without profit in 13 years.

Moodys Investors Service and Fitch Ratings this month cut GMs debt rating two levels. Cash at the companys auto operations has fallen to $19.2 billion from $24.5 billion a year ago.

Slippery Slope
GM auto operations have fallen to $19.2 billion from $24.5 billion a year ago
The annual cost of insuring $10 million of GM debt for five years with credit-default swaps rose to $1.7 million
Things just keep piling one on top of the other for GM, said Rob Hinchliffe, an analyst with UBS Securities in New York who rates GM reduce. GM is one of the two lowest-rated stocks among the 11 auto and auto-parts companies he covers, according to data compiled by Bloomberg.

The annual cost of insuring $10 million of GM debt for five years with credit-default swaps rose to $1.7 million upfront plus $500,000 a year on November 10, compared with an annual premium of about $1 million earlier in the week, traders said. The debt-insurance contracts changed hands at about $260,000 at the start of the year.

Delphi default-insurance sellers started demanding upfront payments on April 19, six months before it filed for bankruptcy on October 8. Credit-default swaps on Delta, which filed on September 14, were trading in January with upfront payments of about $4.5 million. Upfront fees for bankrupt Northwest Airlines Corp, which filed the same day as Delta, were about $4 million. GM spokeswoman Toni Simonetti didnt immediately return calls seeking comment. A derivative is a financial obligation whose value is derived from interest rates, the outcome of specific events, or the price of underlying assets such as debt, equities and commodities.