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Godzilla V.Mothra : General Motors's Debt Costs Surge as GE Pulls Support


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Snides Remarks: Could this be the first shot in a GE Absorbs GM senerio? msnide@theautochannel.com

Fairfield March 22, 2005: Bloomberg reported that General Motors Corp.'s borrowing costs rose to the highest in almost two years after the world's largest carmaker by sales lost financial support from General Electric Co.

The extra yield, or spread, investors demand to hold GM's 8.375 percent bonds due 2033 instead of government debt widened 20 basis points, or 0.20 percentage point, to 516 basis points, the most since the securities were sold in June 2003, according to Trace, the price-reporting service of the NASD. GM shares in Germany fell, dropping 70 cents, or 2.4 percent, to $29.

This ``is the wrong headline at the wrong time,'' Elmar Zurek, who helps manage about $15 billion at DWS Investment Management in Frankfurt, said in a phone interview. Zurek declined to say whether he holds GM bonds.

GE, the world's No. 2 company by market value, yesterday cut short an agreement giving the carmaker's suppliers faster payment. GM, the third-largest corporate borrower in the world with $114.5 billion of bonds, on March 16 forecast its biggest quarterly loss since 1992, prompting Standard & Poor's and Fitch Ratings to say they may lower the automaker's rating to below investment grade.

A slide in the rating to one step above junk, or high-risk, high-yield status, allows GE to stop funding a program that pays GM's parts suppliers within a few business days, rather than the 45 days GM typically takes to pay them.

GE, which administered the program for GM, will stop funding at the end of June instead of providing support until the end of this year, GM spokesman Tom Hill said yesterday.

`Last Thing You Want'

``The last thing you want to see is a liquidity provider pulling its support,'' said Christophe Boulanger, an analyst at Dresdner Kleinwort Wasserstein in Paris who recommends investors hold fewer GM bonds than the indexes they use to measure their performance.

Fitch reduced the carmaker's ratings to BBB-, one step short of high-risk, or junk, level with a ``negative outlook'' following GM's March 16 announcement. Moody's Investors Service also said it may cut the company's Baa2 rating to Baa3, also one step short of junk.

GM's March 16 announcement has hurt bond markets worldwide. The spread investors require to hold U.S. company debt instead of government bonds was about 86 basis points on March 21, up 6.4 basis points from March 15, the day before GM's announcement, according to Merrill Lynch & Co.'s U.S. Corporate Master Index. In Europe, the spread has widened by 5.5 basis points.

Cash Available

GM and General Motors Acceptance Corp., the carmaker's finance unit, each have about $23 billion of cash available, Boulanger said. The company has about $70 billion of credit facilities available, of which about $50 billion was unused at the end of last year.

It's ``a substantial amount compared to the $2 billion that has been canceled,'' Dresdner's Boulanger said.

GM, based in Detroit, has about $16.5 billion of debt coming due this year, according to data compiled by Bloomberg.

The annual cost of insuring $10 million of the debt of General Motor's finance unit for five years via credit-default swaps rose to around $500,000 today from $430,000 yesterday, according to Deutsche Bank AG prices.

GM is the third-biggest member of Merrill Lynch's global corporate bond index, with $66 billion of fixed-rate debt included in the index. GE and Citigroup Inc. are the two largest.