GM Bondholders Not Ready for ‘Panic’ as Strike Enters Third Week

(Bloomberg) -- General Motors Co. bonds might soon slide into reverse, analysts warn, as the company’s contract negotiations with the striking United Auto Workers union head toward their third week.

So far investors have yet to pay the risk much attention, with GM’s debt barely budging over the past two weeks, even as the company loses more than $50 million a day with workers on the picket line. But as the unrest carries on longer than expected, risk premiums are poised to rise, as does the possibility that credit raters take negative action.

“At a certain point, you can’t make up for that level of lost production,” said S&P Global Ratings analyst Nishit Madlani, who forecast that a one week shutdown could amount to $1 billion in cash burn. “After one week, it can be made up, but two weeks and beyond, that’s harder to achieve.”

GM spokesman Tom Henderson declined to comment.

Stock Slide

S&P -- as well as Moody’s Investors Service and Fitch Ratings -- isn’t taking any action yet, as it’s still unclear how talks are progressing, Madlani said. The two sides are fighting over wages and job security, among other things, all of which can impact GM’s long-term cost structure and make forecasts that much harder, he added. It doesn’t help that S&P -- which rates GM BBB, two steps away from junk -- sees global auto sales falling as much as 3% this year, and stagnating for the next two, as the global economy slows.

GM’s stock has fallen more than 3% since the strike started on Sept. 16 -- more than double the decline of the S&P 500 -- while its bonds have held steady. The cost to protect its debt against default has risen, but so has that of its peers and the broader investment-grade market.

The notes may be benefiting from strong demand for investment-grade debt broadly, said Christian Hoffmann, a portfolio manager at Thornburg Investment Management. The high-grade market is riding eight consecutive weeks of inflows, according to Lipper data.

The resilience may quickly fade, however. While automakers have been an out-of-favor sector in both the stock and bond markets this year due to their exposure to trade tensions and cyclicality, investors may not have been positioned for a strike, let alone one that’s lasted this long, said CreditSights analyst Hitin Anand.

“This has blindsided a lot of people,” said Anand, who lowered his rating on GM’s bonds to hold from outperform on Thursday. “If this draws any longer, the maximum threshold is three weeks before panic sets in.”

Strong Liquidity

Working in GM’s favor is a strong liquidity position. The company reported $17 billion of cash and cash equivalents in the quarter ended June 30. It also had around $2 billion available in a revolving credit facility as of that date. By holding off on some expenses and timing certain payments, GM should be able to mitigate some of the cash burn while plants are closed, said Fitch Ratings analyst Stephen Brown.

“They really do have some flexibility out there to ride through this,” Brown said. “They can’t offset all the impact, but they can lessen it a bit.”

Yet the longer the strike drags on, the more difficult it becomes for GM to recoup lost production, which could weigh on its ratings. That’s a risk that bondholders haven’t accounted for, said Bloomberg Intelligence analyst Joel Levington.

“They’re hanging tight assuming everything is going to get worked out,” Levington said. “If raters do take action, it’s completely not priced in.”

--With assistance from Rizal Tupaz.

To contact the reporter on this story: Molly Smith in New York at msmith604@bloomberg.net

To contact the editors responsible for this story: Nikolaj Gammeltoft at ngammeltoft@bloomberg.net, Boris Korby, David Welch

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