Debt of GM and Chrysler Trades at Default Prices

Debt of GM and Chrysler Trades at Default Prices
President Obama’s auto task force visited Detroit on Monday to get an
idea of what the future is for GM and Chrysler. Investors already have a guess, and it’s not pretty, especially for the smallest of the Big Three.
These days, bids to buy Chrysler bank debt are coming in as low as 15 cents on the dollar, according to one person close to the secondary debt market. That’s about half of where bids for GM and Ford bank debt are coming in.
At those prices, the debt of all three companies is trading essentially as if they are in default, analysts said.
“Let’s put it this way, you see a lot of distressed bank debt trading at levels you’ve never seen before… but 15 cents on the dollar, even in this market, is really unusual,” said Shelly Lombard, a senior high yield analyst at Gimme Credit Publications Inc. “When debt gets to that level, especially bank debt, that’s a seriously distressed level.”
According to Thomson Reuters Loan Pricing Corp., GM’s debt was bid at an average of just under 37 cents at the close of business Friday, while Ford’s debt was bid at 33 and a half cents on the dollar. Chrysler’s debt was bid at nearly 17 cents on the dollar, but actual bid quotes from brokers obtained by the Wall Street Journal came in even lower in some instances.
Bid quotes and actual trading prices can vary, but they will mirror each other closely over time. Private debt can be haggled over more than publicly traded stocks, and so bids can occasionally span a wide range. Broker bids obtained by the Journal ranged from as little as 15 cents to as high as 22 cents for Chrysler’s bank debt, with most bids falling in the 15 to 18 cent range.
GM and Ford bank debt traded just over 90 cents on the dollar in January 2008.
Chrysler’s lenders, which include JP Morgan, Citibank and Goldman Sachs, had trouble selling of the loans it lent to the auto maker in August 2007 when it was obtained by Cerberus Capital Management, LP. But as early as May of last year that debt was selling for as little as 67 cents on the dollar, about a quarter lower than GM and Ford’s bank debt. By the end of September Chrysler’s debt had plunged to 40 cents on the dollar, while its Big Three competitors traded at about 20 to 23 cents higher than that.
The three domestic auto makers have seen brief upticks in average bids – or at least halts in decline – at key moments in bids in recent months, including in early December when it became clear the companies would receive aid. But all proved fleeting however.
Chrysler’s roughly $10 $9 billion in outstanding debt is secured by nearly all of its assets, both tangible and intangible. Those assets include valuable brands such as “Jeep,” plant property such as equipment and even tidbits such as carpets and blinds, as well as accounts receivables.
Such tangible and intangible assets are a tough sell in a market where even Chrysler’s competitors may not be able to buy them at a fraction of their original value.
“Nobody wants plants, nobody wants equipment,” said Ms. Lombard. “Nobody wants to buy that stuff right now.”
Civis Romanus Sum

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