Falling Credit Quality of US Firms (WSJ)

Mind The Bond Market Fractures — Credit Downgrades Highest Since 2009

by Wall Street Journal • October 12, 2015

 

By MIKE CHERNEY at The Wall Street Journal

Falling profits and increased borrowing at U.S. companies are rattling debt markets, a sign the six-year-long economic recovery could be under threat.

Credit-rating firms are downgrading more U.S. companies than at any other time since the financial crisis, and measures of debt relative to cash flow are rising. Analysts expect profits at large companies to decline for a second straight quarter for the first time since 2009.

The market for riskier debt has become snarled, raising fears that companies could have trouble repaying their obligations following several years of record debt issuance, low corporate defaults and persistently low interest rates. Reflecting those concerns, investors are now demanding more yield to own corporate bonds relative to benchmark U.S. Treasury securities.

The softening U.S. corporate fundamentals have been largely overlooked as investors focused on sharp declines in the shares, bonds and currencies of many emerging-markets nations. Many analysts say the health of China remains the largest source of uncertainty in the global economy.

But rising downgrades and an increase in U.S. corporate defaults indicate “some cracks on the surface” of the domestic-growth outlook, said Jody Lurie, corporate credit analyst at financial-services firm Janney Montgomery Scott LLC. Many investors closely monitor debt-market trends as an indicator of U.S. economic health.

Bond prices for some U.S. companies have suffered. A 2024 McDonald’s Corp. bond dropped from about 104 cents on the dollar in April to about 99 cents in June after an S&P downgrade in May, according to MarketAxess data.

Bond prices for some U.S. companies have suffered. A 2024 McDonald’s Corp. bond dropped from about 104 cents on the dollar in April to about 99 cents in June after an S&P downgrade in May, according to MarketAxess data. PHOTO: MIRA OBERMAN/AGENCE FRANCE-PRESSE/GETTY IMAGES

In August and September, Moody’s Investors Service issued 108 credit-rating downgrades for U.S. nonfinancial companies, compared with just 40 upgrades. That’s the most downgrades in a two-month period since May and June 2009, the tail end of the last U.S. recession.

Standard & Poor’s Ratings Services downgraded U.S. companies 297 times in the first nine months of the year, the most downgrades since 2009, compared with just 172 upgrades. Meanwhile, the trailing 12-month default rate on lower-rated U.S. corporate bonds was 2.5% in September, up from 1.4% in July of last year, according to S&P.

About a third of the downgrades targeted oil and gas companies or firms in other commodity-linked industries, following a plunge in oil prices in the second half of 2014, said Diane Vazza, head of global fixed-income research at S&P.

Corporate finances are on the decline in other sectors, too. Wireless provider Sprint Corp., hotel and casino operator Wynn Resorts Ltd., insurance company Genworth Financial Inc. and pet-supplies company PetSmart Inc. were among the companies downgraded by S&P this year, highlighting the breadth of industries affected.

Those companies are in the junk category, meaning they are rated double-B-plus or below, but even higher-rated companies like McDonald’s Corp. and Mattel Inc. have been downgraded this year.

Bond prices have suffered. A Sprint bond maturing in 2025 fell from about 96 cents on the dollar to about 77 cents in September after Moody’s downgraded the company. A 2024 McDonald’s bond dropped from about 104 cents in April to about 99 cents in June after an S&P downgrade in May, according to MarketAxess data.

“We’re seeing more widespread weakness across more industry sectors in the U.S.,” Ms. Vazza said. “It’s become broader than just the commodity story.”

U.S. companies have increased borrowing to levels exceeding those just before the financial crisis, as firms pursue big acquisitions and seek to boost stock prices by buying back shares. According to one metric, the ratio of debt to earnings before interest, taxes, depreciation and amortization for companies that carry investment-grade ratings, meaning triple-B-minus or above, was 2.29 times in the second quarter. That’s higher than the 1.91 times in June 2007, just before the crisis, according to figures from Morgan Stanley.

“The metrics that you measure health and credit by have peaked a while ago,” said Sivan Mahadevan, head of credit strategy at Morgan Stanley. “They are beginning to deteriorate.”

Many investors and analysts say the concerns are overdone. They note that the U.S. economy is still expanding and that many large firms continue to raise money at historically low rates. They say the U.S. unemployment rate, which held at 5.1% in September, is the lowest since 2008, despite unease over slowing economic growth overseas.

While “there are some areas of weakness,” Ms. Lurie said, “there are many other points to show positive economic growth.”

Corporate finance chiefs have been willing to absorb downgrades because a stellar rating has become less important, with little price difference between some bonds with ratings a few notches apart. And until recently, companies had little trouble selling debt regardless of their rating.

But lately some companies, including the U.S. arm of Spanish bank Banco Santander SA, have had to pull bond deals and others, like chemical producer Olin Corp., had to pay higher interest rates than initially expected. Bankers lowered the price and increased the interest rate recently on a loan being sold to investors for insurance brokerage Integro Ltd., according to S&P Capital IQ LCD.

Another cause for concern: the earnings outlook is starting to dim, as slower growth in China and low commodity prices begin to hit firms’ revenue. In the third quarter, earnings for S&P 500 companies were expected to decline 5.1% over the same quarter last year, according to data as of Sept. 30 from FactSet. That follows an earnings decline of 0.7% in the second quarter compared with the year ago period.

Big U.S. companies with global footprints, like Caterpillar Inc., Monsanto Co. and Hewlett-Packard Co., have all announced layoffs in recent weeks. Analysts and investors say a strong U.S. dollar compared with currencies in other countries will hurt some U.S. companies’ revenues in the coming months.

Worries about companies’ financial health have pushed the difference in yield—called the spread—between corporate bonds and ultrasafe U.S. Treasurys to its highest level in more than three years, according to Barclays data. A bigger spread means investors want more interest relative to Treasurys to compensate them for the added risk of buying corporate bonds.

The spread for investment-grade firms recently hit 1.71 percentage points, up from 0.97 percentage point in July 2014, a move that analysts warn has foreshadowed broader economic troubles in the past.

“We are less dependent on global growth than many other developed countries, but we are not immune to the weakened economic fundamentals outside the United States,” said Gary Cloud, a portfolio manager who helps oversee the $463 million Hennessy Equity and Income Fund.

Source: Cracks Emerge in Bond Market – WSJ

States in Trouble: Pension Obligations and Credit Ratings (Barrons)

Barron's Cover | MONDAY, MARCH 15, 2010
The $2 Trillion Hole
By JONATHAN R. LAING | MORE ARTICLES BY AUTHOR

Promised pensions benefits for public-sector employees represent a massive overhang that threatens the financial future of many cities and states.

Latest Downgrades to Junk - Fallen Angels (Bloomberg, WSJ)

‘Fallen Angels’ Jump to Third-Highest Monthly Total, S&P Says


By Megan Johnston

July 13 (Bloomberg) -- Fifteen companies lost their investment-grade ratings in June, the third-highest monthly tally since 1987, according to Standard & Poor’s. With rankings for two additional issuers cut to junk status, the number of “fallen angels” climbed to 60 this year with a combined debt of $209.2 billion, S&P analysts led by Diane Vazza in New York said in a report today.

The tally of borrowers downgraded last month to junk, or below BBB-, ranks behind the 19 issuers cut to junk during the Asian financial crisis in December 1997 and the 17 whose credit ratings were reduced in March, S&P said.

The largest fallen angel this year is CIT Group Inc., the New York-based commercial lender that has been unable to persuade the government to back its bond sales, with $38.2 billion in rated debt, S&P said.

Moody’s Investors Service slashed CIT’s credit rating four levels to B3, from Ba2, and said the ranking may be cut further because of the company’s “inadequate progress” toward improving its liquidity, according to a statement today.

An additional 75 issuers with combined debt of $255.2 billion are at risk of losing their investment-grade ratings, S&P said.

“Not surprisingly, many of the sectors represented on the potential fallen angel list -- such as consumer products, forest products and building materials -- show a high preponderance of negative bias,” the S&P analysts said in the report.

To contact the reporter on this story: Megan Johnston in New York at mjohnston17@bloomberg.net

Last Updated: July 13, 2009 14:12 EDT



Standard & Poor's said the number of issuers downgraded to speculative grade last month was the third highest monthly tally since it started keeping track of the figure in 1987.

Fifteen entities were cut to junk territory in June, and with two more added so far this month, the year-to-date tally has jumped to 60 issuers, with rated debt of $209.17 billion affected.

Finance companies lead this year's so-called fallen angels with 10 so far, followed by banks at nine and utilities with six.

S&P said 75 issuers currently exhibit fallen-angel potential - entities rated BBB- either on watch for downgrade or with a negative ratings outlook. Those firms have $255.22 billion of rated debt. Banks still lead the list of companies vulnerable to being cut to junk, with 15 companies, followed by consumer products and insurance with eight apiece and utilities at six.

Struggling U.S. commercial lender CIT Group Inc. (CIT), which could soon file for bankruptcy protection, tops the list as the largest fallen angel so far this year based on debt volume, with $38.19 billion in rated debt.

Besides CIT, other new fallen angels include insurance holding company Ambac Financial Group Inc. (ABK), French auto maker Renault SA (RNO.FR) and U.S.-based bank holding company Whitney Holding Corp. (WTNY).

The Republic of Hungary is the largest potential fallen angel this month, S&P said, with $53.99 billion in rated debt.

-By Kerry Grace Benn, Dow Jones Newswires; 212-416-2353; kerry.benn@dowjones.com

Municipal Bond Default ( Bloomberg )

Subprime Finds New Victim as Muni Defaults Triple: Joe Mysak


Commentary by Joe Mysak



May 30 (Bloomberg) -- The amount of municipal bonds that have defaulted this year is already more than triple what it was for all of 2007.

And who could doubt there's more bad news on the way?

So far this year, $736 million in municipal bonds have defaulted. That doesn't necessarily mean they didn't pay investors; they may have just drawn down reserves. That's what happens just before they stop making payments to bondholders.

During all of 2007, only $226 million in municipal bonds defaulted, according to the May edition of the ``Distressed Debt Securities'' newsletter, published in Miami Lakes, Florida.

That $736 million is nowhere near the record for municipal bond defaults, to be sure. The record year, if you're counting, was 1991, when almost $5 billion went bust. That's still small potatoes compared with what happens over in the corporate-bond market, where $36.6 billion blew up in 2006, and almost $24 billion in 2007.

But wait a minute: Municipal bonds never default, do they? Or at least this is how they are perceived by individual investors, right?

We're probably going to see a lot more munis default this year and in the years to come, because of the subprime crisis and maybe, just maybe, because of the high price of a barrel of oil.

New Residents

The hangover from the collapse in real-estate prices is going to be a boom in so-called dirt-bond defaults.

These are bonds sold by municipalities to build the infrastructure for housing developments, and are backed by the taxes paid by all the new residents who are going to move in. If no residents move in, or too few do, the bonds aren't repaid.

Of the 30 bond issues that have defaulted so far this year, more than half are from issuers in two of the states that have figured prominently in all tales of the housing bust: 10 in Florida and seven in California.

Consider the $50 million in special assessment bonds sold by the Monterra Community Development District in Broward County, Florida, for example. On May 7, the district disclosed that it had tapped its $1,279,200 reserve fund for $1,211,727.11.

You can just stop right there and know that this story is bound to be a sad one.

These particular bonds were sold by the district in 2006 in a limited offering. The bonds were unrated, and sold in minimum denominations of $100,000. The bonds carried a 5.125 percent coupon due in 2014, and were priced to yield 5.198 percent.

Remember Colorado
The Monterra development is located in Cooper City, which is about 20 miles north of Miami and has a population of almost 30,000. Of the 10 Florida bonds that defaulted this year, all were sold by community development districts, and all within the last four years.

The big jump we are going to see in the number of such municipal bond defaults this year won't be limited to Florida and California, but will include all those places where the high tide of real-estate mania has now receded.

This isn't an uncommon phenomenon after housing busts. In the past, the damage was usually confined to certain states where the boom was craziest, such as Colorado in the 1980s.

More bondholders are going to be affected this time around because the housing collapse is more national rather than regional or isolated, and because of the relatively recent development of so many ``exurbs,'' as chronicled, for example, by New York Times columnist David Brooks in his 2004 book, ``On Paradise Drive.''

Three-Hour Commutes

These are the suburbs beyond the suburbs, where Americans have moved to enjoy the good life, commute (usually) be damned. Not too long ago, the newspapers seemed to be filled with stories about people who gladly commuted two and even three hours each way for affordable real estate. Most people knew actual examples of such hearty souls. I wonder how much gasoline at $4-plus a gallon will dent the growth, and tax base, of such communities.

It's not just the price of gasoline that is going to make the nation's many far-flung communities less attractive. On May 28, Bloomberg carried a story detailing how the increase in the price of jet fuel was causing airlines to curtail service throughout the country.

Maybe we'll have to reconsider this whole flight-from-the- coasts idea that got such attention a few years ago.

(Joe Mysak is a Bloomberg News columnist. The opinions expressed are his own.)

To contact the writer of this column: Joe Mysak in New York at jmysakjr@bloomberg.net

Last Updated: May 30, 2008 00:01 EDT

Highest Yield (from Kiplinger Magazine)

Where to Find Top Yields
From safe municipal bonds to risky closed-end bond funds, just about everything is on sale.

By Jeffrey R. Kosnett

From Kiplinger's Personal Finance magazine, June 2009

It's been an excruciating year for income hogs, their favorite investments obliterated by the recession and the credit crunch. Since September, high-yielding standbys such as real estate investment trusts, master limited partnerships, business-development companies, and oil-and-gas royalty trusts have lost 50% or more. Junk bonds and emerging-markets debt have improved of late, but they've still sustained double-digit losses.
From calamity, however, springs opportunity. Many income securities are now tantalizingly cheap. Moreover, issuers of high-yielding stocks and bonds are sure to benefit from reflation -- the stimulation of global economies through massive government spending and rock-bottom interest rates. Reflation, which implies higher inflation, will hurt low-yielding Treasury bonds, but it should boost the profits of energy producers, real estate operators and highly leveraged companies that need to raise prices to prosper.


The bear market in most income investments has resulted in lower cash payouts, too. With virtually all segments of the real estate sector suffering, dozens of REITs have cut their distributions, and many are paying dividends mainly in stock. Energy trusts have trimmed their disbursements because of low prices for oil, natural gas and other products. Led by financials, hundreds of companies have cut or suspended dividends on their common stock this year.

Credit-market chaos wreaked havoc with the recommendations in our previous "yieldfest" (see Earn 8% or More, July 2008). Our best picks, emerging-markets bond funds such as Fidelity New Markets Income and Pimco Emerging Markets Bond, dropped about 10% over the past year through April 9. Pipeline stocks, such as Kinder Morgan Energy, also held up reasonably well. But we had our share of disasters. For example, First Industrial Realty Trust cratered by nearly 90%, while Genco Shipping & Trading dived 73%.

As the economy begins to improve, the rest of this year and 2010 will be much more rewarding for income seekers. From the safest to the riskiest, we offer our best bets for big cash returns over the coming year (of course, you should keep money that you'll need soon in supersafe instruments, such as money-market funds and bank accounts).

Municipal bonds
The recession is putting pressure on state and local coffers, so why feel good about the prospects for municipal debt? Munis, which rarely default, are yielding far more than comparable Treasury securities. This state of affairs is an anomaly because interest from munis is generally free of federal income taxes. And because munis offer such generous yields, they should hold up far better than Treasuries when the economy and inflation pick up. Still, to be on the safe side, we recommend avoiding tax-free bonds with maturities greater than ten years. At ten years, you can still find 4% to 4.5%, tax-free. That's the equivalent of 6% or so from a taxable bond. Ten-year Treasuries, by contrast, yielded 2.9% in mid April.

Like most other sectors of the bond market, munis suffered last year, but confidence in them has improved. Despite California's budget disaster, the state sold $6.5 billion of general-obligation bonds in March, the third-largest muni issue ever. These A-rated bonds have already gained value. In mid April, a California GO maturing in 2019 with a coupon of 5.5% sold at $1,050 for each $1,000 of face value to yield 4.7% to maturity. For a Californian in the top income-tax bracket, that's like getting 8% from a taxable bond. And for the highest earners living elsewhere, it's the equivalent of 7.2% from a taxable bond.

Some discount brokers, such as Fidelity and Charles Schwab, offer scores of good-quality tax-exempt bonds supported by taxes or the revenues from water bills, highway tolls and the like. In mid April, a representative ten-year, double-A-rated, noncallable water-system bond, such as an Orlando utilities commission issue, yielded 4.8% to maturity. If you prefer a fund, Baird Intermediate Muni (symbol BMBSX) was the top medium-maturity muni fund in both 2007 and 2008. Other standouts include Fidelity Intermediate Municipal Income (FLTMX), a member of the Kiplinger 25, and Schwab Tax-Free (SWNTX).

Ironclad mortgages
Toxic mortgages are the match that lit the financial firestorm, but you can't blame government-guaranteed loans from the Veterans Administration or the Federal Housing Administration. The VA foreclosure rate is 1.7%, compared with 13.7% for adjustable-rate subprime loans.

The best way to own these loans is through a Ginnie Mae fund. Backed by the full faith and credit of the federal government, the Government National Mortgage Association guarantees packages of FHA and VA debt bundled together by private lending institutions. From the perspective of timely repayment of principal and interest, Ginnie Maes are just as safe as Treasuries but deliver significantly more yield. And although mortgage rates have fallen, many GNMA funds still own lots of older, higher-paying loans. For example, almost 40% of the loans in Vanguard GNMA (VFIIX) carry yields of more than 6%.

Vanguard's fund and other low-cost Ginnie Mae funds, such as Payden GNMA (PYGNX) and Fidelity Ginnie Mae (FGMNX), still yield about 5%. GNMA yields should decline by half a percentage point by the end of 2009 because lower mortgage rates encourage more borrowers to refinance. But these securities will generate higher cash flows after mortgage rates, like other long-term rates, start to turn up later this year.

Bank-loan funds
These funds hold slices of adjustable-rate loans and lines of credit that banks extend to companies with junk credit ratings of single-B or double-B. Adviser Mark Gleason, of Wescap Management Group, in Burbank, Cal., aptly calls a bank-loan fund "a hybrid between a junk-bond fund and a money-market fund." The bank funds currently yield 4.5% to 6%, which is far short of junk's double-digit yields. But their loans are safer because their terms are short, their interest rates float with changes in short-term rates, and they are ahead of bonds on the repayment pecking order should the borrower default. However, like stocks and junk bonds, bank loans gain value prior to or in the early stages of an economic recovery. Year-to-date through April 9, bank-loan funds returned an average of 11.1%, tops among bond-fund categories.

By contrast, in the three-month period that ended last November, the average bank-loan fund lost 29% as the credit crunch and selling by hedge funds slashed the value of bank debt. But defaults didn't get out of hand, so funds such as Fidelity Floating-Rate High Income (FFRHX) and the closed-end PIMCO Floating Rate Strategy (PFN) kept up decent monthly distributions even as their share prices dropped. These payouts are sliding because short-term interest rates are near zero, but bank-loan funds still offer better yields than short-term-bond funds. Gleason sees annual total returns of 9% to 11% through 2012.

Triple-B corporate bonds
This is the sweet spot in taxable bonds. In 2008, the gap between yields of a basket of triple-B-rated bonds and Treasuries exploded from two percentage points to six and a half. In mid April, the gap was almost five points, which is attractive when you consider that bonds rated triple-B are still considered investment-grade. Moreover, the category harbors a bunch of recession-hit companies that traditionally have carried single-A ratings. Today's triple-B roster includes Altria, Burlington Northern, Johnson Controls, Kraft Foods, Black & Decker, Sunoco and XTO Energy. All will thrive in better times.

For safety's sake, choose bonds from across several industries. Noncallable bonds are nice, but as rates rise, you won't see many redeemed early anyway. In mid April, an Altria bond maturing in 2018 and carrying a 9.7% interest coupon was priced to yield 8% to maturity. Bank and insurance bonds offer high yields because financial issuers are riskier than industrials, despite government efforts to keep them afloat without nationalizing them.

Pipelines
Energy prices will rise as industry expands and people drive more. So you can buy energy-income investments at sale prices and hold on for what should be higher future dividends. If you think oil prices will zoom or if you just want to hedge against inflation, buy BP Prudhoe Bay (BPT), a royalty trust that passes through cash from the sale of crude oil. BPT crashed last summer and has cut dividends two times since, but it's back to $68 from a low of $50, and it yields 6%.



If you don't want to gamble on energy prices, pipelines and storage facilities are the ticket. Their dividends depend on the amount, not the price, of the products that move through these systems. Energy Transfer Partners (ETP), Kinder Morgan Energy Partners (KMP) and Magellan Midstream Partners (MMP) all have long histories of delivering dividends reliably, and they currently yield from 8.8% to 9.2%. Because these firms are set up as master limited partnerships, they'll send you a Form K-1 at tax time, rather than a Form 1099, and that could mean extra work filling out your returns.

Preferred stocks
It wasn't just common stocks that went on a tear after bottoming on March 9. Preferred stocks, which act a lot more like bonds than stocks, also rallied strongly. From March 9 through April 9, iShares U.S. Preferred Stock Index (PFF), an exchange-traded fund, rocketed 66%, although it remains 45% below its 12-month high. Tom Taylor, of Thoma Capital Management, in Towson, Md., notes that a preferred stock from Bank of America (BAC.H) yields 14% to maturity in 2013 and cannot be called or exchanged. The stock surged from $5 to $15 between February 19 and April 9. But its face value is $25, so it can still go higher.

Preferreds, despite the reassuring name, are not risk-free. Issuers can cut or suspend preferred dividends, as a handful of REITs have done during the financial crisis. And if a company files for bankruptcy, bondholders take precedence over preferred investors. You can spread your risk with a fund that focuses on preferreds. John Hancock Preferred Income (HPI), a closed-end fund, owns far fewer financials than does the iShares ETF. At its April 9 close of $12, the fund traded at a 4% premium to its net asset value and yielded 15%. It would be better if the fund traded at a discount to NAV, but the modest premium is acceptable.

Junk corporate bonds
Let's face it: Recessions are not good for junk bonds and their issuers. Junk-rated companies are young, troubled, highly leveraged, or some combination of the three. So it's not surprising that they suffer when sales sink and questions about their ability to service their debt mount.

But the current recession has been less discriminating than most. Previous junk-bond routs involved "bad companies with bad balance sheets," says Mark Durbiano, a manager at Federated Investors who has seen the good, the bad and the ugly during a 25-year career investing in high-yield bonds. This time, he says, investors pummeled bonds of essentially good companies, such as First Data and SunGard, whose high debt loads earn them junk ratings. The average junk bond recently yielded 18%, a near-record 15 percentage points more than Treasury bonds.

But now, with signs that the economy is thawing and bargain hunters nibbling, things are starting to look up. The average junk-bond fund, which lost 26% last year, returned 6% in 2009 through April 9. The indexes -- but not the whole sector -- will take a temporary hit if General Motors, a huge junk-bond issuer, defaults. But the three primary junk ETFs -- SPDR Barclays Capital (JNK), iShares iBoxx $ High Yield (HYG) and PowerShares High Yield (PHB) -- hold few or no GM bonds (but plenty of health and technology issues). Each yields 10% or higher.

Wild closed-ends
We've saved our lottery tickets for last. Scott Leonard, of Trovena, an advisory firm in Redondo Beach, Cal., seeks out income-oriented closed-end funds in struggling but improving sectors that are leveraged, selling at big discounts to NAV. Dozens qualify. Consider, for example, Cohen & Steers REIT and Utility Income (RTU). At its April 9 close of $5.28, the fund sold at a whopping 25% discount to NAV and yielded a similarly massive 26%. Or look at BlackRock California Municipal Income Trust II (BCL). At a price of $10.18, it traded at a 19% discount to NAV and yielded 6% tax-free. Don't put more than 5% of your income assets into these kinds of funds because when they're bad, they're really, really bad.



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GM financials point toward Bankruptcy (Bloomberg News)

GM Loss Widens to $5.98 Billion as Bankruptcy Looms (Update1)

By Jeff Green and Katie Merx

May 7 (Bloomberg) -- General Motors Corp. said its first- quarter net loss widened to $5.98 billion as sales plunged by almost half, ratcheting up the prospect of a bankruptcy filing by a U.S.-imposed June 1 deadline.

The net loss of $9.78 a share swelled from $3.3 billion, or $5.74, a year earlier, Detroit-based GM said today. Revenue tumbled 47 percent to $22.4 billion, while cash consumption almost doubled from the previous quarter.

The results add to the pressure on GM as it races to cut costs and debt to avoid bankruptcy. With bondholders resisting a plan ordered by the Obama administration to exchange $27 billion in debt for a minority stake in a reorganized GM, the 100-year- old automaker may end up in court.

“If the deadline for proving viability is a few weeks away, these earnings would indicate to me that it’s nearly impossible to get there,” said Kevin Tynan, a New York-based Argus Research analyst who advises selling GM. He said “a clean slate from bankruptcy” may be the best way to return to profit.

GM is ready to go “in and out quickly” should it need to file for bankruptcy, Chief Financial Officer Ray Young told reporters at the automaker’s headquarters. The proposed debt exchange with bondholders is the biggest piece of $44 billion in obligations that GM is working to shrink as it survives on $15.4 billion in emergency federal aid.

Cost Structure

“The first-quarter results reinforce the plan we announced at the end of April to bring our cost structure down aggressively,” Young said.

Excluding some costs, the first-quarter loss was $9.66 a share, or $5.9 billion, GM said. That beat the average $10.97 loss estimate from 11 analysts surveyed by Bloomberg.

The biggest U.S. automaker used $10.2 billion more in cash than it generated from operations, almost twice as much as the consumption of $5.2 billion in the fourth quarter. Cash on hand at the end of March was $11.6 billion, a decrease from $14.2 billion as of Dec. 31, as new government aid partially offset the drain on GM’s reserves.

Young said the cash use was less than GM projected in a February report to the U.S. Treasury, in part because of $3 billion in structural cost reductions in the quarter. He reiterated that GM will need $2.6 billion in U.S. Treasury funds in May and $9 billion more after that.

GM dropped 6 cents, or 3.6 percent, to $1.60 at 4:15 p.m. in New York Stock Exchange composite trading. The shares have declined 50 percent this year for the worst performance in the Dow Jones Industrial Average, and they may be removed, said John Prestbo, the editor and executive director of Dow Jones Indexes.

‘Revenue Implosion’

GM slashed quarterly output by about 40 percent to 903,000 vehicles as demand waned, which accounted for “the revenue implosion,” Young said.

The net deficit included one-time gains from erasing some debt and charges such as $822 million in costs related to the Feb. 20 bankruptcy of its Saab Automobile AB unit, which GM wants to unload. Before today, losses at the company totaled $82 billion since 2004, its last profitable year.

President Barack Obama set the June 1 bankruptcy deadline on March 30, giving GM 60 days to restructure out of court. He rejected the company’s original plan to shed 47,000 jobs this year and cut about $28.5 billion in union and bond debt, saying it wasn’t enough to return the automaker to viability.

Under the survival plan unveiled April 27, GM agreed to kill the Pontiac brand, close two more plants and eliminate at least 7,000 more union jobs by the end of next year. GM said today it expects to cut more salaried and executive jobs, without elaborating.

U.S. Control

GM’s plan envisions that the U.S. would control at least 50 percent of 60 billion shares in a restructured company, and a union-run health-care fund would get as much as 39 percent. Unsecured bondholders would get 10 percent and existing shareholders would get 1 percent, GM said.

Bondholders would receive 225 shares in the new automaker for each $1,000 in principal. When the exchange is complete, GM would do a 1-for-100 reverse split of the stock.

Without support from 90 percent of the bondholders by May 26, GM plans to file for bankruptcy, Chief Executive Officer Fritz Henderson said after unveiling the offer.

Bondholders countered that proposal with a plan calling for GM to give them 58 percent of the equity in the reorganized company. Henderson told reporters earlier this week that the Treasury has indicated it “would not be supportive of shareholding in excess of 10 percent” for the bondholders. GM’s 8.375 percent bonds due in July 2033 fell 0.35 cent to 8 cents on the dollar, yielding 102 percent, according to Trace, the bond-pricing service of the Financial Industry Regulatory Authority. Dwindling Sales

The discussions among GM, Obama’s car task force and the bondholders are unfolding against a U.S. auto market that shrank 34 percent last month.

GM reported an adjusted automotive operating loss of $3.9 billion in the first quarter, wider than the $808 million deficit a year earlier.

Each of the automaker’s regions experienced a drop in earnings from a year earlier due to slumping sales, with the $3.2 billion operating loss in North America the worst deficit.

Without a new cost-saving labor agreement, GM’s Canada unit will be liquidated, the Canadian Auto Workers union said today, citing discussions with government officials. CAW leaders told reporters in Toronto they had been ordered back to the bargaining table with GM under a May 15 deadline to reach an accord or lose the possibility of more government aid.

Young said there were sales bright spots in such markets as China, Germany and Brazil, where governments implemented programs to stimulate demand. Results in those countries support GM’s argument in favor of U.S. incentives to promote auto purchases, he said.

“We just need to get this bankruptcy speculation and rumor behind us,” Young said during a conference call. “That’s clearly having an impact on our sales.”

To contact the reporters on this story: Jeff Green in Detroit at jgreen16@bloomberg.net; Katie Merx in Detroit at kmerx@bloomberg.net.

Last Updated: May 7, 2009 16:21 EDT

Your Retirement Paycheck: Model Portfolios from Kiplingers Magazine

Investments That Pay You Every Month
These three portfolios should produce reliable yields of 5% to almost 10%.

By Jeffrey R. Kosnett

May 4, 2009

In the summer of 2008, I devised three portfolios composed entirely of investments that pay dividends or interest every month. These portfolios are ideal for people who need spending money, as opposed to those who invest in bonds, real estate investment trusts or other kinds of income-oriented vehicles for diversification. The yields on these portfolios ranged from 6% for a mix of moderate-risk bond funds and high-dividend stock funds to more than 10% for a riskier collection of energy royalty trusts, leveraged bank-loan funds and foreign-currency bond funds.



For the most part, the dividends have held up -- the notable exceptions being the oil-and-gas pass-through investments and the bank stocks. But the principal has fallen far more than I imagined even remotely possible. By the time the stock market bottomed in March, share prices for a package of energy income trusts, bank-loan funds and REITs were, on average, half of what they were in mid 2008. If you had started the aggressive, high-income portfolio in June or July of 2008, you were probably down 30% or so on a total-return basis.

Not surprisingly, the lowest-risk portfolio did considerably better, although it, too, was in the red. That package had one-fourth invested in energy and other high-wire stuff, one-fourth in a high-dividend, exchange-traded stock fund, and the rest in Vanguard Total Bond Market Index. The portfolio generated about 8% in income and lost about 20% of its market value -- lousy but, all things considered, tolerable.

Assembling a ladder of Treasury bonds over the past year would have produced a small capital gain, but it would have left you far short of needed income. And that's still true today. You can't build a high-income portfolio -- whether it pays monthly or less frequently -- without taking some risk with your principal.

The good news is that all of these high-risk categories are past the worst. Junk bonds and bank-loan funds have been recovering handsomely in 2009. Ditto for REITs. Payouts -- and share prices -- of oil-and-gas trusts remain depressed, but energy prices and cash disbursements will rise as the world economy improves.

Still, the fact that such formerly trouble-free investments as Enerplus Resources Fund (symbol ERF), a trust that owns a diversified package of energy-producing properties in North America, and Eaton Vance Senior Floating-Rate Trust (EFR), a closed-end bank-loan fund, could lose more than 50% in less than a year is troubling. Many reputable financial advisers and I believed that investments that paid a steady stream of income would be fairly stable. That perception is another casualty of the financial crisis.

So it's time for a new, post-collapse edition of the Cash In Hand Monthly Income Plan. You may have less principal now, but the principle remains the same. You choose from among three approaches: Shoot for maximum yield of 9% to 10%; go conservative and pick up about 5%; or take a middle-of-the-road course. The growing number of bond ETFs (see Welcome Additions: More Bond ETFs), which make monthly distributions, provides some fresh choices. Only a few open-end bond funds, REITs and energy pass-throughs pay 12 times a year (although virtually all Vanguard bond funds pay monthly).

High-risk, high-yield plan
Estimated yield: 9.5%

35%, energy trusts. Energy is still the leading category to hunt for high current income. The typical royalty trust or master limited partnership is priced to yield about 10%. Choose at least three out of a group that includes names such as Cross Timbers Royalty Trust (CRT), Enerplus, Penn West Energy Trust (PWE) and Provident Energy Trust (PVX). All are fairly diversified. Avoid trusts that sell only natural gas. Gas should be a good long-term investment, but there's a surplus of it now and its price will stay depressed longer than oil's price will.

20%, bank-loan funds. The best no-load, open-end fund in this category is Fidelity Floating Rate High Income Fund (FFRHX). Among leveraged, closed-end funds, two possible choices are BlackRock Floating Rate Income Strategies Fund (FRA) and BlackRock Floating Rate Income Strategies II (FRB). In early May, both sported high yields, and their share prices traded at discounts to the value of their underlying assets (that's a must if you invest in a leveraged closed-end). Two parts Fido to one part BlackRock sounds like a good recipe.

15%, corporate junk bonds. Vanguard's low-cost, no-load offering, Vanguard High-Yield Corporate (VWEHX), is the first choice here. Loomis Sayles Bond Fund (LSBRX) is really more of a go-anywhere fund, but it usually holds a substantial amount of its assets in junk bonds and emerging-markets bonds, as well as investment-grade corporates. The fund, a member of the Kiplinger 25, yields about 9.7% and complements the Vanguard fund well.

15%, real estate. The anchor of every check-a-month plan should be Realty Income (O). This is a high-quality, one-of-a-kind REIT that calls itself the Monthly Dividend Company. It owns more than 2,000 properties leased to well-known retailers and restaurant chains. Realty Income has paid 463 consecutive monthly dividends. Not every streak is solid these days, but this one is as close as you can get to a sure thing. Plus, the share price fell far less than that of most REITs during the market's downturn. Realty Income yielded 8% in early May.

10%, preferred stocks. The PowerShares Preferred Portfolio (PGX) is an unleveraged ETF that passes through dividends from an array of preferred bank and utility stocks. It has stabilized after losing half its value from May 2008 to February 2009.

5%, emerging-markets bonds. Two ETFs, iShares JPMorgan U.S. Dollar Emerging Markets Bond (EMB) and PowerShares Emerging Markets Sovereign Debt (PCY), invest in bonds from such places as Russia, Brazil, Turkey, Indonesia and Mexico. After running into trouble in the fall of 2008, the funds, both of which pay monthly, have rebounded handsomely.

The centrist plan
Estimated yield: 8%.

Choose among the same funds, trusts and ETFs as above, but tweak the allocation to make room for a chunk of investment-grade corporate bonds. You could split the high-grade bond exposure between Loomis Sayles Bond and an ETF such as iShares iBoxx Investment Grade Corporate Bond Fund (LQD). The mix:

20%, energy trusts.

20%, investment-grade corporate bonds.

15%, bank-loan funds.

15%, Realty Income.

15%, corporate junk bonds.

10%, emerging-markets bonds.

5%, Vanguard GNMA (VFIIX). The soundest mortgage-related investment around, this Vanguard fund invests in securities backed by the full faith and credit of the U.S. government.

The conservative plan
Estimated yield: 5.5%.

The conservative plan emphasizes the entire range of bonds, including Treasuries (which can't go bust but yield next to nothing and will almost surely lose value if inflation accelerates and if interest rates rise). Then we add some other safe, high-yield categories for balance.

60%, diversified, high-quality bonds. Pick either Vanguard Total Bond Market Index (VBMFX) or its ETF sibling, Vanguard Total Bond Market ETF (BND). You'll get paid about the same each month; the main disadvantage of the ETF is that you incur commissions every time you buy or sell.

10%, energy trusts.

10%, Realty Income.

10%, bank-loan funds.

10%, Vanguard GNMA.


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All contents © 2009 The Kiplinger Washington Editors

WSJ Deal Journal: Basis Trade ( Bond + Credit Default Swap)

May 4, 2009, 1:30 AM ET

The Brighter Side of ‘Evil’ Credit-Default Swaps
By Heidi N. Moore

Credit-default swaps have been demonized as having played a role in the struggles of insurer American International Group and in the collapse of Bear Stearns.

But these derivatives can be a force for good. Indeed, demand for credit-default swaps is among the factors spurring the revival in the market for corporate bonds. Large institutional investors, hedge funds in particular, are buying more investment-grade and high-yield corporate bonds of late and are pairing them with credit-default swaps to earn extra return, according to investment bankers.

The bond-swap combinations are called “basis packages,” though they aren’t sold together. The name refers to “basis trades,” a common way for investors to take advantage of the price differences between a derivative and the underlying security. In the current iteration, an investment bank sells bonds on behalf of a company and the buyers then buy swaps tied to the bonds. In the past month, this investment strategy has helped spur demand for bond offerings from Lenar, Supervalu and Toll Brothers.

Credit-default swaps are a kind of insurance policy against issuers defaulting on their debt. In the past few years, hedge funds bought swaps largely to bet a company might default, and then bought the underlying bonds because they needed to pair the so-called short (swaps) and long (bond) positions. Now, hedge funds want the bonds and are buying the swaps to juice their returns and pair the trade.
It can be a profitable strategy in volatile markets, which is one reason bankers say it has picked up steam in the past month.

Here is how the math can work: A hedge fund buys a company bond trading at 50 cents on the dollar and a swap tied to the debt at, say, 80 cents on the dollar. If the issuer defaults and the debtholders get, say, 30 cents on the dollar in a recovery, the hedge fund would have a loss of 20 cents on the dollar for the bonds but a return of 50 cents on the dollar on the swap.
Such basis packages drove hedge-fund interest in recent high-yield deals, such as Supervalu’s $1 billion offering on April 30, according to people familiar with the deal. Supervalu originally intended to sell only $500 million of bonds, but hedge funds looking to fill basis packages doubled the demand. These people say it was sold to 200 institutional investors. In fact, the Supervalu offering was spurred by what investment bankers call “reverse inquiry,” which means buyers actually approached the investment banks—Credit Suisse Group, Bank of America Merrill Lynch, Citigroup and Royal Bank of Scotland Group—seeking out a deal.

The strategy poses risks if investors have to sell positions to meet margin calls for the bonds or the swaps before either brings a return.

Credit-default swaps may not yet have a sparkling-clean reputation—but for many investors that is a secondary concern, since sitting around on piles of cash is no way for a hedge fund to live.

GM Bondholders Make Counter Proposal (Marketwatch)

Bondholders present plan to win GM control
By Shawn Langlois, MarketWatchLast Update: 10:24 AM ET Apr 30, 2009


SAN FRANCISCO (MarketWatch) -- General Motors bondholders on Thursday will present a counteroffer to the automaker's debt swap that would relieve creditors of their $27 billion of debt in return for a majority stake in the company.

The move, which also aims to ease concerns over the U.S. government nationalizing the Detroit giant, comes as similar talks between Chrysler and its debt holders reportedly were on the verge of collapse.

The ad hoc committee of GM (GM) bondholders said their plan would see them get 58% of the new company in return for debt forgiveness while saving U.S. taxpayers $10 billion in cash.
The union health-care fund, based on the $20 billion in benefits owed, would own 41%. Existing stockholders would receive 1% of the new GM under the plan.

Eric Siegart, senior managing director of Houlihan Lokey Howard and Zukin and financial advisor to the bond group, said the government would not get equity under the scenario because it would not have to reduce any of its $20 billion in loans.

"We do not believe that nationalizing one of America's largest and most important companies is the right policy decision for our country," he said.

The group plans to propose the plan to the Auto Task Force on Thursday afternoon, but President Barack Obama's team previously urged creditors to take the original proposed deal or risk getting even less in the courts.

Treasury officials have said that 90% of GM bondholders must take part in the exchange. The automaker has until June 1 to complete the debt-for-equity swap to avoid a bankruptcy filing.

GM shares gained 3.9% to $1.88 in early trades but are still down 92% in the past year.




Copyright © 2009 MarketWatch, Inc. All rights reserved.

Financial Times: GM's New Offer to Bondholders

GM plans new offer to holders of bonds
By Bernard Simon in Toronto

Published: April 24 2009 03:00 | Last updated: April 24 2009 03:00

General Motors is set to make a fresh debt-exchange offer to its unsecured bondholders on Monday consisting almost entirely of equity in the beleaguered carmaker, which would be far less generous than previous offers.

GM, which is racing to meet a June 1 restructuring deadline set by the US Treasury, will also soon outline a fresh set of proposals to the United Auto Workers union aimed at reducing labour costs. In February, GM demanded the UAW accept shares rather than cash for half of its contribution to a union-managed healthcare trust to be set up next year.

The plan required unsecured bondholders to exchange at least two-thirds of their holdings, with a face value of $27bn, for equity and other securities. GM's last offer totalled 24½ cents on the dollar, comprising 8 cents in cash and 16½ cents in new unsecured debt.

But the US administration's industry taskforce has demanded deeper sacrifices.

Neither the bondholders nor the union are keen to commit themselves without knowing what deal has been cut with the other. However, legal requirements, such as minimum offer deadlines, have forced GM to give priority to the bondholders.

Separately, the deadline for Delphi, GM's biggest parts supplier, to reach agreement on outstanding issues with GM has been extended to May 4.

Production cuts

General Motors plans sharp cuts in its North American vehicle production this summer to bring down swollen inventories caused by the steep drop in demand for its cars and trucks.

The embattled carmaker also ascribed the cutbacks to concern about the stability of Delphi, its biggest parts supplier, which has been struggling to emerge from bankruptcy protection for more than three years.

GM said the normal two-week summer shutdown would be extended by one to eight weeks at 13 of its 20 assembly plants in an effort to reduce dealer inventories.
Copyright The Financial Times Limited 2009

Moody's List Companies at Risk of Default (WSJ )

March 9, 2009
The 'Bottom Rung' -- Companies at Greatest Risk of Defaulting

Moody's Investors Service is launching a list called the "Bottom Rung," which details 283 companies that are at risk of defaulting on their debt. Below are the 30 largest companies on the list, based on rated debt.



Allison Transmission, Inc. B3 B3 Negative 4.60 Automotive: Parts
AMR Corp. Caa1 Caa1 Negative 1.62 Transportation Services: Airline
Building Materials Corporation of America Caa1 B3 Negative 1.55 Manufacturing: Finished Products
Chrysler LLC Ca Ca Negative 9.00 Automotive: Passenger
Citadel Broadcasting Corp. Caa3 Caa2 Negative 2.29 Media: Broadcast Tv & Radio Stations
Claire's Stores, Inc. Caa3 Caa3 Negative 2.59 Retail: Department Stores
Dana Holding Corp. Caa1 Caa1 Rating under reveiw 2.08 Automotive: Parts
Dole Food Company, Inc. Caa1 B3 Negative 1.51 Natural Products Processor: Agriculture
Eastman Kodak Co. B3 B3 Negative 2.10 Technology: Hardware
Ford Motor Co. Caa3 Caa3 Negative 31.55 Automotive: Passenger
Freescale Semiconductor, Inc. Ca Caa1 Negative 10.20 Technology: Semiconductor
General Motors Corp. Ca Ca Negative 38.56 Automotive: Passenger
Georgia Gulf Corp. Caa2 Caa2 Negative 1.98 Chemicals: Commodity Chemical
Hawker Beechcraft Acquisition Co. B3 B3 Negative 2.85 Aircraft & Aerospace: Equipment
Idearc, Inc. Caa3 Caa2 Negative 9.29 Media Publishing: Books
Lear Corp. Caa2 Caa2 Rating under reveiw 2.30 Automotive: Parts
Level 3 Communications, Inc. Caa1 Caa1 Rating under reveiw 1.87 Telecommunications: Wireline
Michaels Stores, Inc. B3 B3 Negative 3.93 Retail: Specialty
OSI Restaurant Partners, Inc. Ca Caa1 Rating under reveiw 2.11 Restaurants: Family Dining
R.H. Donnelley Corp. Caa2 Caa1 Negative 3.48 Media: Printing - Holdco
Reader's Digest Association, Inc. Caa3 Caa3 Negative 2.21 Media Publishing: Newspapers & Magazines
Realogy Corp. Caa3 Caa3 Negative 7.56 Services: Consumer
Rite Aid Corp. Caa2 Caa2 Negative 6.80 Retail: Drug Stores
Source Interlink Companies Inc. Caa1 Caa1 Negative 1.63 Media Publishing: Newspapers & Magazines
Swift Transportation Co., Inc. Caa1 Caa1 Negative 2.98 Transportation Services: Trucking
Tenneco Inc. B3 B3 Negative 1.83 Automotive: Parts
Univision Communications, Inc. B3 B3 Negative 10.09 Media: Diversified Media - Fc
US Airways Group, Inc. Caa1 Caa1 Negative 1.60 Transportation Services: Airline
Visteon Corp. Caa1 Caa2 Negative 3.20 Automotive: Parts
Western Refining, Inc. B3 B3 Negative 1.40 Energy: Oil - Refining & Marketing

Sources: Moody's Investors Service

Ford Reducing Debt (Forbes)

Autos
Ford's Fancy Footwork
Joann Muller, 03.05.09, 6:41 PM ET

DETROIT, MICH. -
You've got to hand it to Ford Motor. The No. 2 U.S. automaker is so far navigating brilliantly through a very dangerous minefield while the fate of its U.S. competitors, General Motors and Chrysler, looks bleaker by the day.

To be sure, Ford is barely healthier than Chrysler and GM, whose auditors said Thursday there is "substantial doubt" about GM's ability to remain in business. But unlike its rivals, Ford so far has not asked for government loans to stay alive. Instead, chief executive Alan Mulally has moved quickly to try to dictate the terms of the industry's painful restructuring--before GM and its government overseers do so.

Ford was first, for instance, to strike a deal with the United Auto Workers union about how to pay for retiree health care. Ford's deal, allowing it to fund up to half its $13.2 billion future liability with stock instead of cash, is likely a model for GM, which is still locked in tough negotiations with the UAW.

Then came Ford's announcement late Wednesday of a tender offer to retire up to 40% of its debt at just 30 cents on the dollar. The offer was shrewdly timed, coming on the eve of a crucial meeting Thursday between President Obama's auto industry task force and a committee representing GM's bondholders.

GM must reduce its $27 billion in debt by two-thirds in order to satisfy terms of the $13.4 billion taxpayer loan it received from the federal government on Dec. 31. Bond analysts say that in exchange for trading their debt for 33 cents on the dollar, GM bondholders want a government guarantee on the new debt (a treasury bond of sorts) and a stake in the reorganized GM.
But with Ford, which is arguably in better financial shape offering less to its own bondholders, that looks unlikely. As a result, GM's debt restructuring effort could be more difficult. GM says it hopes to launch a debt exchange offer by March 31, a government-imposed deadline.

By acting ahead of GM, Ford is trying to limit any competitive advantage GM could gain through a government-dictated restructuring. "It's another stick in GM's side," says Kip Penniman, bond analyst with KDP Investment Advisors. "Ford has essentially set the tone for GM's bondholder negotiations. If Ford's tender offer is relatively successful, it will make it much more difficult for GM's bondholders to receive significantly greater value."

While GM and its bondholders wrangle under government pressure, "Ford is essentially allowing its bondholders to take some money and run," says Gimme Credit analyst Shelly Lombard.

Of course, Ford's offer is voluntary and there's no guarantee enough bondholders will accept the swap by its March 19 preliminary deadline. Some might hold out for a higher offer.

The deal could allow Ford to retire up to $10.4 billion of the $25.8 billion in debt it had as of Dec. 31, saving more than $600 million a year in interest payments. But old debt is already being replaced by new debt. In January, Ford said it would draw down the last $10 billion of its revolving bank credit line. It is also seeking more than $1 billion in loans from the Energy Department to retool its factories to produce fuel-efficient vehicles.

"What this does do," says Penniman, "is it gives Ford a tremendous amount of political good will in the event they have to go back to the government and say, 'We did our best, we reduced debt, we got concessions from the UAW and yet the economy has overwhelmed us.'"

Indeed, like GM and Chrysler, Ford's biggest problem is not its debt burden or its labor costs but the drastic collapse in vehicle sales. Until consumers start buying again, every carmaker is in peril.

See Also:

Ford Finds Dilution A Better Idea Than Bailout

Dead End For General Motors?

U.S. Consumers Not Consuming

Ford Tender Offers on Debt (SEC Filings)

FORD MOTOR CREDIT COMPANY ANNOUNCES LAUNCH OF CASH TENDER OFFERS AS PART OF FORD MOTOR COMPANY’S DEBT RESTRUCTURING PLAN

Financial Times: GM deadline nears

GM fights to avoid bankruptcy protection
By Julie MacIntosh and Nicole Bullock in New York and John Reed in Detroit and Bernard Simon in Toronto

Published: February 9 2009 19:37 | Last updated: February 9 2009 23:43

General Motors is working to convince key stakeholders to help it avoid the need to seek bankruptcy protection but, because such an effort would probably require more government money, its most critical task will be addressing the US Treasury’s concerns over the terms of its investment.

GM must present a plan proving its long-term viability to Congress by next Tuesday as a condition of the $13.4bn emergency bridge loan it was granted in December.

Several sets of negotiations are taking place simultaneously. They revolve around GM’s proposal to swap up to two-thirds of its debt for equity, and fresh concessions from the United Auto Workers, including the financing of a new union-administered healthcare fund.

Only advisers to the various parties are currently involved in the talks, which are expected to centre on due diligence issues for the next day or two, one person familiar with the negotiations said.

The US government has the power to either endorse GM’s plans or push it into bankruptcy and the US Treasury’s decision to hire advisers Cadwalader, Wickersham & Taft, Sonnenschein Nath & Rosenthal and Rothschild suggest it may be toughening its stance.

“The government is the biggest stakeholder here,” one person close to the matter said. “Unless they agree the plan is viable and they consent, the debt becomes due.”

If the government gives GM additional funding, the structure and terms of both its old and new investments could come up for debate, including whether taxpayers’ interests should come before those of current debtholders.

The government’s role as stakeholder reduces GM’s options. But it also gives it more weight in negotiations with unions, auto dealers and bondholders.

“The carrot is, this is in everybody’s best interest,” said Don Workman, a bankruptcy lawyer at Baker & Hostetler LLP. “The stick is, they’re saying that if we don’t do this consensually, GM and Chrysler will go into bankruptcy court and the judge will prime you.”

Separately, GM is negotiating with bankrupt Delphi, its largest supplier, to take over some of Delphi’s manufacturing plants, a person briefed on the talks said.

The move could give GM more flexibility in its negotiations with the United Auto Workers, the labour union.

Bondholders said their talks with GM were ongoing. The company’s long-term bonds were quoted at their low of 13 cents on the dollar. In an indication of the severity of the situation, the same bonds were quoted at around 80 cents a year ago.

Copyright The Financial Times Limited 2009