According to UniCredit SpA [via Bloomberg], one of America's three biggest automakers is almost certain to default within the next five years. Extrapolating from risk premiums on credit-default swaps, GM faces an 84 percent chance of default, while Ford is looking at "at least 75 percent risk." Jochen Felsenheimer, chief of credit strategy at UniCredit, says "The costs imply there is close to 100 percent probability that one of the big three will file for Chapter 11 bankruptcy." And there's little the D3 can do to prevent default if the overall economic climate doesn't improve– and soon. "There might be a default at any time.'' It's the Collateralized Debt Obligations (CDOs), stupid. A variant of the Structured Investment Vehicles that brought down the mortgage market, CDO's are securities that repackage pools of bonds, loans and credit-default swaps and divide their cash flow into notes of varying risk and returns, which are then sold to investors. Credit-default swaps on GM and Ford were included in more than 80 percent of CDOs created before they lost their investment-grade debt rankings in 2005, according to Standard & Poor's. Bottom line: if one of the domestics goes down, it's taking a whole lot of market with it. With GM paying $4.7m upfront plus $500,000 a year to secure each $10m in financing, it's not a question of if, but when.
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Wow. 5 years out there. Living on the edge with that prediction aren’t they.
No one can say where oil will be priced in the next week, but they got the % of likelyhood that “one” of the big guys will buckle. In five years.
Damn. That’s risky.
This just in: Dark tonight, with chance of light early tomorrow morning.
Not exactly an edgy prediction from ol’ UniCredit SpA.
Yea, and some day the Earth the will be hit by another comet or asteroid. Hey, let’s make it within the next 15 years, why stop at 5? When it finally happens they will look like freaking geniuses.
Assuming they’re not just pulling the numbers out of thin air, this is not a prediction, it’s an attempt to measure probability. They’re calculating the odds of something happening. It’s not rocket science, nor is it astrology.
I still want a Camaro, I hope GM some how pulls it together. Can’t by from a company in Chapt. 11.
Well, sometimes you can read too much into the financial markets hedging of debt quality. Remember, these are all the same geniuses who thought CDO’s backed by option ARM liar loans were only slightly more risky than government backed bonds as recently as 2-3 years ago. Just as they were too optimistic before, they could be too pessimistic now.
And remember, there are more than two options here. One option, no defaults, bonds get paid, Big Three continue as going concerns. Another option, default and CH11. Third option, bond holders agree to a haircut to avoid C11, expecially if congress gives them some incentive (tax or otherwise) to do so. My bet is on third option for Ford/GM, Chrysler is toast and will be sold off before the end of next year.
Wall St at it’s worst. They demand predictability, no suprises whatever is happening in the real world. So, in the absence of certainty they take refuge in probability measured by percentages (they love numbers)- and guess what, someone who wants their 5 minutes of fame states that percentage as ‘fact’.
What they don’t say is that it is a probability guesstimate assuming that nothing changes – like alternative fuels, end of the credit crunch, GM getting a BoD who can do their job, Fords Eurocars being successful (and profitable)…….
Of course the double tradegy is that the guys at the top of GM & Ford believe the same as Wall St (same MBO colleges), predictability is everything – no suprises.
If you state the obvious, it makes you look like an expert!
The market is easy to predict. Just make any guess, hold the course, and you will be proven correct. Eventually.
It’s an underlay. 100% of chance of all of them going, unless they get a Federal bailout.
I notice there’s no mention of Chryco.
Didn’t TTAC predict that Chrysler will file by August 4th? It’s August 5th, and nothing happened. Or did something change behind the scenes that I’m unaware of that negated this prediction?
Yea, anyhow ? Where’s that Chrysler bankruptcy we were promised in August ? And when does the GM death watch series reach 200 ?
I highly doubt any of the Big 3 will go into bankruptsy. In 2009, there all will have new models and refreshes and with the cuts to trucks/SUVs to, should help improve their image a bit for consumers. And on the exception of a few models, most every GM and Ford equal Toyota and Honda in quality now.
The only thing I see about prodictions is this, is that when the time comes there is a 95% change they are always wrong. And if its an estimated guess on how long they will last, then there is always that chance the company will still make it out of there.
If this silliness is true. Lets all hope it is Chrysler. Think weakest link…
The first bankrupcy occurs in the auto industry when the first major bank holding paper calls the note, or refuses to lend more.
The fear of the banks is that they are so far in over their heads with these loans that in bankrupcy they may go down with the auto company they are taking down.
It’s called being a large creditor and owning the bank. When your banker fears you may catch cold, he hands you a kleenex not a forclosure notice. When he has to tell the World he signed and packaged all of that worthless paper he is hisory along with the auto execs.
So not to worry, the banks must keep playing along.
It might be forgotten, that the collateral is all of these wonderful plants that make unwanted cars and trucks. These assets are worth a lot less in a smaller car market. In other words, if these mortgaged plants aren’t needed again to ever make vehicles they are now worth just real estate value.
I don’t have to see the papers to know that the banks put in far more than the basic real estate value. They valued platinum brands like Buick, pontiac, saturn, GMC. Plus it probably says in the loan docs that GM for instance is the Worlds largest car mfg with 27% of the US car market. Should these bankers be worried?
…And then the American taxpayer is going to bail them out.
Some companies, like some people, just need to go away.
an 84 percent chance of default, while Ford Motor Co. has at least a 75 percent risk, according to UniCredit data. Combined with Chrysler LLC, the probability that one of the three will be unable to fund its business is more than 95 percent.
They don’t give the Chrysler data, so I can’t be sure, but they probably suck at math.
If you have two independent events, each with a 50% chance of happening, it’s true that there’s a 75% chance of at least one of them happening.
However, Ford and GM and Chrysler going bankrupt are not independent events. There are lots of ways that all three of them could go down, or all three of them could stay afloat, since they tend to have the same advantages, the same problems, and the same management techniques.
Didn’t TTAC predict that Chrysler will file by August 4th? It’s August 5th, and nothing happened. Or did something change behind the scenes that I’m unaware of that negated this prediction?
If you make enough predictions, some of them are bound to come true.
nonce,
So it’s the “throw stuff at the wall and see what sticks” philosophy to predictions. I’m down with that, everybody’s done it.
95% chance of bankruptcy in FIVE years! Didn’t realise they were in such a healthy position at the moment