By Karen Brettell
NEW YORK, Dec 11 (Reuters) - A bankruptcy filing by General Motors Corp could unleash a chain of devastating defaults by other automakers and suppliers, creating widespread new losses in debt and stock markets.
The White House urged Republicans in the Senate on Thursday to back a $14 billion bill to rescue the U.S. auto industry but the measure was in danger of sputtering out and dying.
GM and Chrysler want loans by month's end to survive. Ford is asking for a line of credit to be tapped if its finances worsen more than expected in 2009. For details, see
'The assumption is that if the government doesn't provide this loan to GM and Chrysler that they're not just going to file for bankruptcy, they're going to liquidate,' said Shelly Lombard, analyst at independent research firm Gimme Credit.
The dramatic pullback in lending by banks and other lenders amid the global credit crisis has dried up access to loans, known as debtor-in-possession (DIP) loans, needed by companies to restructure under bankruptcy protection.
That makes it hard for cash-strapped companies filing for protection but unable to get a DIP loan to avoid liquidation.
'Usually a company files and immediately they get a big DIP, because they want to be sure they can pay suppliers etc. Those days are probably gone,' said Lombard. 'GM and Chrysler would need a $10 or $15 billion DIP and I don't think there's anyone out there that could provide something like that.'
Politicians may not understand the consequences of not providing a loan, she said.
Republicans want more accountability from the car makers in exchange for the loans and more protection for taxpayers.
MASS DESTRUCTION
A GM liquidation would flood the market with cheap cars, hurting sales of competitors including Ford Motor Co.
Suppliers like American Axle & Manufacturing Holdings , which makes the vast majority of its sales to GM and Chrysler, would also be likely to fail, analysts said.
GM and Ford had in excess of $21 billion in domestic, short-term trade payables as of Sept. 30 and the failure to meet these payments in a timely manner would be crippling to auto suppliers, said Mark Oline, analyst at Fitch Ratings.
'The systemic risk of a GM bankruptcy is liquidation, as the failure of payments could cascade through the auto and auto supplier sectors,' Bank of America analysts said in a report.
The ability for a supplier to survive will depend on their exposure to GM and Chrysler and whether they have enough cash to survive any restructuring needed for their own business, said Gimme Credit's Lombard.
'It's going to be all over the map, but it's definitely not going to be GM and Chrysler go in (to bankruptcy) and nobody else folds,' she said. 'This is going to be mass destruction.'
THE PRICE OF LIQUIDATION
GM's bonds are trading between 16 and 20 cents on the dollar, indicating a strong likelihood of bankruptcy filing.
What may not be priced in, however, is the impact of a wave of defaults in the auto industry, and how little debt may be recovered in a liquidation.
'I think if GM liquidates the recovery to bondholders could be zero,' Lombard said.
Bank lenders to automakers would also see large losses.
'In liquidation you're just selling off the inventory at a discount, it's not enough value to cover even the secured bank debt,' she said.
A wave of auto defaults also poses risks to sellers of default protection on a benchmark high-yield credit derivative index, which is heavy on auto names.
'If the government allows General Motors to fail without any assistance, we believe the domino effect across the auto sector will be significant and the high-yield default rate could hit 13 percent' in 2009, analysts at Barclays said in a report.
This compares with a default rate of as low as 7 percent if the auto sector recovers, they said.
Net volumes of around $82.54 billion are outstanding on the current and last three series of the high yield index, according to data by the Depository Trust & Clearing Corp.
Broader debt markets would also likely be impacted by a GM failure as investors become even more risk averse on uncertainty over how far losses may spread.
'We think that the repercussions of a GM bankruptcy filing would certainly be very widespread and ultimately unpredictable,' said Fitch's Oline.
(Editing by James Dalgleish) For other related fixed-income quotations, stories and guides to Reuters pages, please double click on the symbol: U.S. corporate bond price quotations... U.S. credit default swap column........ U.S. credit default swap news.......... European corporate bond market report.. European corporate bond market report.. Credit default swap guide.............. Fixed income guide..................... U.S. swap spreads report............... U.S. Treasury market report............ U.S. Treasury outlook.................. U.S. municipal bond market report...... Keywords: MARKETS CREDIT/ (karen.brettell@thomsonreuters.com; Tel: +1 646 223 6274; Reuters Messaging: karen.brettell.reuters.com@reuters.net) COPYRIGHT Copyright Thomson Reuters 2008. All rights reserved. The copying, republication or redistribution of Reuters News Content, including by framing or similar means, is expressly prohibited without the prior written consent of Thomson Reuters.
NEW YORK, Dec 11 (Reuters) - A bankruptcy filing by General Motors Corp could unleash a chain of devastating defaults by other automakers and suppliers, creating widespread new losses in debt and stock markets.
The White House urged Republicans in the Senate on Thursday to back a $14 billion bill to rescue the U.S. auto industry but the measure was in danger of sputtering out and dying.
GM and Chrysler want loans by month's end to survive. Ford is asking for a line of credit to be tapped if its finances worsen more than expected in 2009. For details, see
'The assumption is that if the government doesn't provide this loan to GM and Chrysler that they're not just going to file for bankruptcy, they're going to liquidate,' said Shelly Lombard, analyst at independent research firm Gimme Credit.
The dramatic pullback in lending by banks and other lenders amid the global credit crisis has dried up access to loans, known as debtor-in-possession (DIP) loans, needed by companies to restructure under bankruptcy protection.
That makes it hard for cash-strapped companies filing for protection but unable to get a DIP loan to avoid liquidation.
'Usually a company files and immediately they get a big DIP, because they want to be sure they can pay suppliers etc. Those days are probably gone,' said Lombard. 'GM and Chrysler would need a $10 or $15 billion DIP and I don't think there's anyone out there that could provide something like that.'
Politicians may not understand the consequences of not providing a loan, she said.
Republicans want more accountability from the car makers in exchange for the loans and more protection for taxpayers.
MASS DESTRUCTION
A GM liquidation would flood the market with cheap cars, hurting sales of competitors including Ford Motor Co.
Suppliers like American Axle & Manufacturing Holdings , which makes the vast majority of its sales to GM and Chrysler, would also be likely to fail, analysts said.
GM and Ford had in excess of $21 billion in domestic, short-term trade payables as of Sept. 30 and the failure to meet these payments in a timely manner would be crippling to auto suppliers, said Mark Oline, analyst at Fitch Ratings.
'The systemic risk of a GM bankruptcy is liquidation, as the failure of payments could cascade through the auto and auto supplier sectors,' Bank of America analysts said in a report.
The ability for a supplier to survive will depend on their exposure to GM and Chrysler and whether they have enough cash to survive any restructuring needed for their own business, said Gimme Credit's Lombard.
'It's going to be all over the map, but it's definitely not going to be GM and Chrysler go in (to bankruptcy) and nobody else folds,' she said. 'This is going to be mass destruction.'
THE PRICE OF LIQUIDATION
GM's bonds are trading between 16 and 20 cents on the dollar, indicating a strong likelihood of bankruptcy filing.
What may not be priced in, however, is the impact of a wave of defaults in the auto industry, and how little debt may be recovered in a liquidation.
'I think if GM liquidates the recovery to bondholders could be zero,' Lombard said.
Bank lenders to automakers would also see large losses.
'In liquidation you're just selling off the inventory at a discount, it's not enough value to cover even the secured bank debt,' she said.
A wave of auto defaults also poses risks to sellers of default protection on a benchmark high-yield credit derivative index, which is heavy on auto names.
'If the government allows General Motors to fail without any assistance, we believe the domino effect across the auto sector will be significant and the high-yield default rate could hit 13 percent' in 2009, analysts at Barclays said in a report.
This compares with a default rate of as low as 7 percent if the auto sector recovers, they said.
Net volumes of around $82.54 billion are outstanding on the current and last three series of the high yield index, according to data by the Depository Trust & Clearing Corp.
Broader debt markets would also likely be impacted by a GM failure as investors become even more risk averse on uncertainty over how far losses may spread.
'We think that the repercussions of a GM bankruptcy filing would certainly be very widespread and ultimately unpredictable,' said Fitch's Oline.
(Editing by James Dalgleish) For other related fixed-income quotations, stories and guides to Reuters pages, please double click on the symbol: U.S. corporate bond price quotations... U.S. credit default swap column........ U.S. credit default swap news.......... European corporate bond market report.. European corporate bond market report.. Credit default swap guide.............. Fixed income guide..................... U.S. swap spreads report............... U.S. Treasury market report............ U.S. Treasury outlook.................. U.S. municipal bond market report...... Keywords: MARKETS CREDIT/ (karen.brettell@thomsonreuters.com; Tel: +1 646 223 6274; Reuters Messaging: karen.brettell.reuters.com@reuters.net) COPYRIGHT Copyright Thomson Reuters 2008. All rights reserved. The copying, republication or redistribution of Reuters News Content, including by framing or similar means, is expressly prohibited without the prior written consent of Thomson Reuters.