< What half a million bucks buys you | Main | "Coach, did you see that guy's tattoo?' >
November 17, 2005
Checking in on GM's Enronesque experience
Following up on posts here and here from last week, General Motors' seemingly relentless descent into a formal reorganization under chapter 11 continued yesterday as its share price fell to its lowest closing since December, 1991. Previous posts on GM's developing problems are here.
Probably the best indication of the risk of a GM bankruptcy is in the credit markets. Over the past week, the price of a GM bond maturing in 2033 has fallen about four points (i.e., about $40 per $1,000 face value) to yield 12.9%. On the other hand, the price of protection against a GM default in the market for credit derivatives is increasingly expensive. As of yesterday, the price of protection -- essentially insurance against a default -- on $10 million in GM bonds had risen to above $2 million up front plus $500,000 per year. That compares with a $1.6 million up front payment for such price protection just last week.
Interestingly, GM remains reasonably liquid, with around $19 billion in cash or other cash equivalents, and that liquidity is often touted by the company in media releases as proof that it is not contemplating a bankruptcy case. However, as folks who are familiar with reorganizations know, a company that needs to go through a chapter 11 case is far better advised to do so when it is flush with cash than to wait until its cash reserves have been depleted. A company in need of a reorganization never should wait until it can't afford to go bankrupt.
Posted by Tom at November 17, 2005 04:18 AM
Trackback Pings
TrackBack URL for this entry:
http://mtcgi.kir.com/mt-trackbk.cgi/2614
Comments
Post a comment
Thanks for signing in, . Now you can comment. (sign out)
(If you haven't left a comment here before, you may need to be approved by the site owner before your comment will appear. Until then, it won't appear on the entry. Thanks for waiting.)