Several of TTAC's Best and Brightest sent us links to today's Wall Street Journal article "GM Slates Sweeping Rebates As Toyota Closes In on No. 1." That's bad news, but it's not new news– in these parts anyway. The real reason so many of our readers sent the tip is buried in the body copy of the story. "The cost of insuring against a default in GM's bonds has soared to a high in recent weeks as fears of a bankruptcy-court filing have grown. An investor who wants to buy credit protection on $10 million in GM's bonds for five years currently has to pay $2.8 million upfront and $500,000 annually for that insurance, through what are called credit-default swaps. A year ago, that protection cost only $400,000 annually, with no upfront cost, according to Credit Derivatives Research LLC. Based on market prices, debt investors currently see more than a 70% chance that GM will default on its obligations sometime in the next five years, said Boaz Weinstein, co-head of credit trading at Deutsche Bank AG." The really worrying part? "A spokesman for GM said it has sufficient liquidity for 2008. He declined to comment on 2009." Saepe ne utile quidem est scire quid futurum sit.
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What interest rate are these things paying that spending 30% of the value of the bond + 5% annually makes even the tiniest bit of sense?
@toxicroach
You can buy them all day long at anywhere from 11-14% on short-term (1-2 year).
Nice illustration for the bond issue!
What interest rate are these things paying that spending 30% of the value of the bond + 5% annually makes even the tiniest bit of sense?
They need to factor all the risk. No different than insuring a person just after a stroke & triple bypass. They’re in the biz of making money not sure lose either.
toxicroach – More likely the eventual buyers are people who already own the bonds and are trying to avoid loosing all of their money.
Thanks for linking the latin. That’s service!
Translating Latin makes my head hurt.