Credit market won't be fazed by GM bankruptcy, say analysts

Despite its size, the largest industrial bankruptcy in US corporate history is unlikely to have much of an effect on the credit derivatives markets, suggest analysts.

Detroit-based General Motors (GM) and three of its subsidiaries filed for Chapter 11 in the US Bankruptcy Court for the Southern District Court of New York on June 1. The company, which has $82.29 billion in consolidated assets, according to the court filing, will use US government assistance to try to emerge from bankruptcy within 60-90 days.

Analysts noted the filing does not incorporate GM’s financial services arm GMAC, which could have potentially caused greater harm for credit investors.

“GM was popular in old synthetic collateralised debt obligation (CDO) deals, but not since it was downgraded in 2005,” said Mikhail Foux, credit strategist at Citi in New York.

GM is a component of series 12 of the Markit CDX index of high-yield North American CDSs. It is also present in series 8, 9, 10 and 12 of the LCDX indexes of North American loan CDSs (LCDSs).

According to the New York-based Depository Trust & Clearing Corporation, there are credit default swaps (CDSs) worth $35.013 billion in gross notional linked to GM, although market participants have net exposures of just $2.309 billion. Much of this will have already changed hands due to the posting of collateral.

As a result, the carmaker's bankruptcy is unlikely to cast ripples across the market akin to those seen after other recent failures, said Foux.

“This is a big auction, but if you look at when they tried to settle [CDSs referencing government-backed mortgage financiers] Fannie Mae and Freddie Mac, there was much more CDS written in notional on those names. For the derivatives market, there will not be such a big effect from GM,” he said.

London- and New York-based Fitch Ratings has already reported the bankruptcy will have a limited impact on its ratings both for synthetic corporate CDOs and auto-loan asset-backed securities. Just one Fitch-rated synthetic CDO tranche was at imminent risk of default as a result of the move, the agency said.

While GM was present in 217 Fitch-rated CDOs globally in June 2005, there are now only 41 CDOs rated by Fitch with exposure to the company.

A credit event determinations committee unanimously agreed that a credit event had occurred on GM on June 1, according to the International Swaps and Derivatives Association. No date has yet been set for auctions to cash-settle CDSs linked to GM’s defaulted debt.

Prices on the company’s bonds, which were trading at around 15 cents to the dollar on June 1, were likely to decline before any auction occurred, predicted Foux. “We have been surprised by the number of low recovery rates at auction recently, so I would not be surprised to see lower recoveries than we see implied by GM bonds right now.”

Whether or not GM manages to extract itself successfully from bankruptcy might have ramifications for a string of other related companies. Amid a number of cash-settlement auctions for other names, a date has yet to be set for auctions to cash-settle CDSs on Michigan-based auto parts supplier Visteon, which filed for Chapter 11 bankruptcy protection on May 28.

The long-term implications of GM's bankruptcy and the impact on the US economy and other corporate credits could place additional strain on corporate CDOs, Fitch warned. In particular, if more automotive suppliers continued to default with low recoveries, CDOs with exposure to the sector would suffer.

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