Tuesday, August 5, 2008

Auto Industry Default Risk Soars to 95% on GM, Ford.

Contracts to insure $10 million of General Motors Corp. debt cost a record $4.7 million upfront plus $500,000 a year, indicating 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.

GM, the world's largest automaker, reported the third- biggest loss in its 100-year history last week, while Ford said it's shutting down two plants making its best-selling F150 pickup as U.S. auto sales tumbled 13 percent in July. Chrysler's failure to get all of the $30 billion in renewed funding it sought this week may restrict its ability to finance sales to customers and dealers.

``There might be a default at any time,'' said Jochen Felsenheimer, the Munich-based head of credit strategy at UniCredit, Europe's fourth-biggest bank. ``The costs imply there is close to 100 percent probability that one of the big three will file for Chapter 11 bankruptcy.''

Contracts on Dearborn, Michigan-based Ford, the second- biggest automaker, cost $3.9 million in advance and $500,000 a year. Credit-default swaps on Auburn Hills, Michigan-based Chrysler loans are $1.9 million upfront and the annual $500,000 charge, UniCredit prices show.

Almost 29 percent of Detroit-based GM's stock available for trading has been sold short, compared with 15 percent for Ford, based in Dearborn, Michigan, according to Bloomberg data.