NEW YORK -- Dealers have started quoting General Motors bonds as if they were already junk rated, in the latest sign that investors are preparing for the automaker to lose its investment-grade status.
GM bonds have been reeling since Wednesday, when the world's largest automaker slashed its 2005 profit forecast, and Standard & Poor's and Fitch Ratings took initial steps to cut the company's debt ratings to junk. Downgrades from both agencies could force legions of investment-grade portfolio managers to shed GM holdings, punishing the corporate bonds of GM and General Motors Acceptance Corp., its finance arm.
Some investors and dealers are already bracing for the downgrade by quoting GM's bonds in price terms, which is how junk bonds are quoted, rather than in terms of yield relative to Treasuries, which is how investment-grade bonds are quoted.
Nine of 16 major U.S. corporate bond dealers said they were quoting GM's bonds on both a spread basis and a dollar price basis, while the other seven were still quoting the company's bonds on a spread basis only.
"We're seeing the perceived risk profile for these GM bonds shifting from high-grade to high-yield," said Nik Vasilakos, credit analyst at Merganser Capital Management LP in Boston. Merganser owns a small holding of short-dated GM notes.
A spokesman for GM said, "We do not think it's a foregone conclusion that we will be downgraded, but we have taken numerous steps to prepare for a downgrade so that GMAC can continue to operate and deliver sustainable earnings and dividends to GM if we are cut."
But the chance of GM bonds being cut to junk is seen as increasingly high, which may explain why the company's short-term bonds were hit so hard relative to Treasuries on Monday.
Most of GM's short-dated bond prices are significantly higher than the company's long-dated bond prices. But in the worst-case scenario of GM filing for bankruptcy protection, the unsecured bonds would all be worth the same amount of money, because all would have an equal claim on the company's assets.
"It's hard to envision GM filing for bankruptcy with our significant cash and liquidity," the GM spokesman said.
Few investors believe the company will file for bankruptcy protection because it has some $57 billion of cash and marketable securities on its balance sheet and real assets it can sell off in a pinch.
But no matter how unlikely bankruptcy is, given that all obligations would be worth the same amount in a worst-case scenario, it makes sense to see a convergence in prices between higher and lower dollar price bonds, said Darin Feldman, portfolio manager at Aladdin Capital, in Stamford, Connecticut.
Spreads on General Motors Acceptance Corp. notes with a 6.75 percent coupon due 2006 widened an eye-popping 1.05 percentage point to 2.87 percentage point on Monday, or 100.125 cents on the dollar, according to MarketAxess.
Spreads on GMAC's 6.75 percent notes due 2014 widened 0.38 percentage point to 4.08 percentage point, or 87.393 cents on the dollar.
GM is wrestling with significant problems. It has high inventories, is losing market share in the key North American market, and faces sky-high pension and health care costs. These factors led the company to warn on Wednesday that 2005 earnings would be as much as 80 percent below its prior forecast.
Standard & Poor's, which rates GM at a step above junk revised the outlook on GM's debt to negative from stable.
Fitch cut GM's debt ratings to a step above junk, and left the outlook at "negative."