The automaker posted a $4.2 billion loss for the third quarter
on Friday and said it would cut white-collar jobs and slash next
year's capital spending budget by $2.5 billion to try to cope with
a sharp sales slowdown.
In spite of this bad news, JPMorgan analysts rate GM's bonds a
"buy."
"We believe GM has several sources of liquidity it can access to
bridge the company to 2010 when it realizes considerable cost
cuts," analysts Eric Selle and Atiba Edwards said in a report.
These include an overfunded pension plan, possible asset sales,
capital market transactions, equity injections, cost cutting and
government loans, they said.
GM's benchmark 8.375 percent bond due 2033 has dropped to 25.75
cents on the dollar, from 36.5 cents at the end of October,
according to MarketAxess. The bonds had traded at more than 80
cents on the dollar at the beginning of the year and currently
yield 32.5 percent.
The automaker's credit default swaps are also trading at
extremely distressed prices, costing 68.5 percent the sum insured
as an upfront cost, plus 5 percent in annual premiums for five
years, according to Markit.
That means it costs $6.85 million to insure $10 million in debt
for five years, plus $500,000 annually.
"We view the upside (driven by stabilization of U.S. sales
volumes and liquidity enhancement measures) on the bonds as much
higher and more likely than the downside of a potential
bankruptcy," JPMorgan said.
"GM's recent product successes (award-winning styling,
performance and quality) and its considerable international
profitability give us confidence they can become profitable in
North America selling cars," they added.
The analysts added that they have factored in economic weakness
for the next 2-1/2 years.
In addition to GM's bonds, selling protection on the debt using
credit default swaps is also attractive, as is buying its term
loan, JPMorgan said. They added, however that the company's
short-term survival will require the help of the government and/or
its suppliers.
Analysts at independent research firm KDP Advisors, meanwhile,
said they expect GM will benefit from additional government loans
and that it is likely to avoid bankruptcy.
They have a "hold" recommendation on its bonds, however, due to
the risk that the company may restructure its debt, or push them
further down in the capital structure, which will be harmful to
bondholders.
"The Detroit automakers have, in essence, been pursuing an
out-of-court restructuring over the past three years. These efforts
have produced a competitive labor contract with the UAW, a viable
solution to reduce retiree healthcare expense, and a substantial
downsizing of capacity and headcount," analyst Kid Penniman said in
a report.
"Incremental gains achieved through bankruptcy would be minimal
in comparison and would likely result in an even further
deterioration of enterprise values as consumers would be far less
likely to purchase an expensive vehicle from a bankrupt
manufacturer, with or without government guarantees," he added.