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Penoles increases silver price outlook and will buy more silver concentrate
By David Wigan
Tuesday, March 28, 2006
LONDON -- Like the elephant in the living room, the decline of
General Motors is a problem that investors don't want to think about
but can't ignore.
The world's largest automaker, whose debt is close to the gross
domestic product of Belgium, lost more than $10 billion last year
and is facing a bankruptcy that would reap devastation in the
GM's share price has halved in the past year, while its $100 billion
of bonds have been cut to junk, confronting investors with the
prospect of never getting their money back. Others in the highly-
leveraged derivatives market face incalculable losses should a
"A GM default would be absolutely huge," said Jonathan Loredo, of
credit manager Cairn Capital. "It would be the biggest thing to hit
the market in terms of losses and operational stress."
There is no understating the scale of GM's problems. It is losing
market share in the United States, has $300 billion of long-term
debt, provides health benefits to 1.1 million people (at the rate of
about $1,500 per car produced), is threatened with a strike by its
largest supplier, which is bankrupt, and is being investigated by
the Securities and Exchange Commission.
Few who invest do not have some level of exposure -- GM stock and
debt are held by the biggest investment banks and smallest retail
GM, or its financing arm GMAC, is present in around 65 percent of
synthetic collateralized debt obligations (CDOs), according to
Standard & Poor's, and underlies an estimated $1 trillion of default
The company's impact is evidenced by the CDX credit default swap
indices. The U.S.-based CDX4 equity tranche, containing GM, trades
at 36 points up front; the same tranche in series 5, without GM,
costs 27.5 points. One firm out of 125 accounts for almost a third
of the premium.
All that for a company with a market capitalization of $12.8 billion.
Still, investors struggle to judge whether the automaker, which
sells 21 percent of cars in the United States, will ultimately
"A bankruptcy filing is unlikely this year," said Christophe
Boulanger, auto analyst at Dresdner Kleinwort Wasserstein. "Unless
Delphi goes on strike -- in which case they would stop production
and it would all be over."
Parts supplier Delphi, which filed the biggest bankruptcy in U.S.
automotive history in October, is negotiating with the United Auto
Workers union and GM over wage and benefit issues, with a strike
threatened if there is no settlement.
Should a strike be called, GM could be bankrupt by June, Boulanger
said. After that any scenario might play out, but the status of GMAC
will be crucial.
GMAC has traded at a premium to its parent in the credit markets on
hopes a controlling stake will be sold, ring-fencing the company and
possibly returning it to investment grade. Yet despite GM's best
efforts, no buyer has emerged.
Further complicating the outlook, if GMAC is not sold and GM does go
bankrupt, it is uncertain GMAC would be consolidated in the filing.
For bond investors, a GM bankruptcy would be hard, but a GMAC
bankruptcy would be disastrous. GMAC is home to three quarters of
the group's bonds and is found in a large proportion of outstanding
"The high degree of portfolio overlap between synthetic CDO
transactions sets this asset class apart," said Standard & Poor's
analyst Andrew South. "A rating action on GM could have a widespread
effect on many CDOs."
The complex market in CDO squared, or CDOs of CDOs, also faces
significant risk following a GM downgrade, one London-based hedge
fund manager said.
"To be blunt -- it would be carnage," he said.
Part of that carnage would be in the back offices of financial
institutions, which will have literally millions of transactions to
unwind, and banks are already under regulator pressure over backlogs
in credit derivatives.
Of course, the best possible outcome may also be the most likely.
That is, GM will survive.
Having spent around $15 billion renewing its product offering, it is
certain that the company will do everything in its power to avoid
bankruptcy, Boulanger said.
There are positive signs on negotiations with unions, a cap on
salaried retirees' health care at 2006 levels, and 30,000 job cuts
Further, the precedents are good. In 1980 Chrysler stepped back from
the brink, while Nissan Motor performed a similar feat 20 years
Ultimately it is probably investors who are best placed to judge
GM's prognosis, and the cost of one-year default protection on GM is
currently higher than five-year protection.
In other words, if the elephant is still in the room in 18 months,
you can probably ignore it.
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