Maybe it's time to sell those once rock-solid bonds of General Motors and GMAC


December 04, 2005|By GAIL MARKSJARVIS

Cars and bonds have nothing in common.

You probably are thinking that any fool knows that.

But on an emotional level, investors missed that point the past few years. They bought bonds of General Motors Corp. and its General Motors Acceptance Corp. financial services subsidiary, figuring they were as rock solid as the cars they've seen on the street all their lives.

Familiarity with the GM name and its vehicles bred complacency. But with GM's financial problems a mainstay of business headlines lately, retirees have sought assurances from me that they will be able to count on income from their bonds and preferred stock.

Unfortunately, those assurances are not available.

"The risks are significant, and investors must incorporate these risks into their investment decisions," Merrill Lynch analyst Matthew Burnell said in a recent report.

Burnell thinks there's more than a 30 percent probability that GM will file for Chapter 11 bankruptcy protection over the next two years.

And if that happens, he said, investors probably would not get back their full principal - the money they originally invested in the bonds.

If the company were to be liquidated, Burnell estimates, GM bonds would be worth less than half of their value.

And if GMAC filed separately for bankruptcy, those bonds would be worth about 90 cents on the dollar, he said.

GM could file for Chapter 11 to give the company a chance to get out from under contracts with the United Auto Workers - contracts that saddle GM with pension and retiree health-care costs the company cannot afford on a long-term basis, analysts say.

Bond analyst Richard Lehmann of Income Securities Advisors estimates that if GM goes through Chapter 11 bankruptcy, investors would end up with bonds worth about 65 cents on the dollar, or a little less than where they are trading.

But he doesn't think the company will file for Chapter 11. He assumes GM will be able to renegotiate contracts with the UAW.

But predicting the outcome of union negotiations is not easy.

Analysts are focused on union negotiations at Delphi Corp., a major supplier of GM's auto parts that has filed for bankruptcy protection.

If talks fail and workers strike at Delphi, that could present dire consequences for GM, Delphi's former parent, said Shelly Lombard, a high-yield-bond analyst for Gimme Credit.

GM has about $19 billion in cash. But lately GM has been burning through cash at a disturbing rate, about $2 billion a quarter, because customers are reluctant to buy sport utility vehicles, and GM has to cut prices to compete with overseas automakers.

If Delphi workers strike, and GM has to cut production sharply, UBS analyst Rob Hinchliffe estimates the automaker would burn through its cash in 10 weeks.

The concern is, "They won't have enough cash to pay the bills," Lombard said.

If the Delphi matter is resolved without a strike, GM would have time to try to put the company on stronger footing. The automaker is attempting to sell a 51 percent stake in GMAC, which makes auto, commercial and residential loans.

The sale, if successful, could provide GM with $13 billion, but Burnell notes there is uncertainty surrounding that deal, too. Potential buyers could be deterred by the possibility that GMAC would be forced in a GM bankruptcy to pay for some of the automaker's pension costs.

Previously, GM struggled through recessions, but now the economy and employment are strong, said Margaret Patel, who manages the Pioneer High Yield bond fund.

"If GM is not prospering in these times, that ought to tell you this is different," Patel said.

Readers may leave messages for Gail MarksJarvis at 312-222-4264.

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