04/03/2009

Bankruptcy Threat Hits Chrysler, GM Bonds

President Obama's threat to push Chrysler and General Motors into bankruptcy has all but ruled out the possibility of those companies securitizing auto loans anytime soon, while scaring off secondary-market buyers of their bonds.

Investors grew worried that cashflows supporting their bonds backed by Chrysler and GM auto loans would plummet if one or both of the companies reorganized under Chapter 11 of the U.S. Bankruptcy Code. Equity analysts predicted that bankruptcy filings would cause immediate 10-25% declines in the resale values of Chrysler and GM vehicles - and some borrowers would respond by stopping their monthly car-loan or lease payments.

Such a scenario would also mean fewer proceeds from sales of repossessed cars - capital that helps support securitizations. Those concerns were reflected this week, as values among auto-loan securities issued by Chrysler Financial and GMAC fell, while other issuer's deals leveled off after rallying in the preceding days. It didn't seem to matter that one of the strongest selling points of asset-backed securities has always been that they are insulated from the risks of bankruptcy.

In thin trading, 1-year senior bonds backed by Chrysler Financial loans changed hands this week at spreads yielding 800-900 bp over swaps, 100-200 bp wider than a week earlier. The wider spreads translated into a price of about 89 cents on the dollar for the securities.

Two-year GMAC issues, meanwhile, were offered at 800 bp over swaps, which wasn't enough to attract any takers. By contrast, 2-year asset-backed securities issued by other automakers were trading at an average spread of around 200 bp over swaps.

Neither Chrysler Financial nor GMAC would be subject to the bankruptcy plan Washington is crafting for their affiliated auto manufacturers.

Meanwhile, investors are also worried the administration won't honor their contracts on billions of dollars of bonds backed by floorplan loans that Chrysler Financial and GMAC write to finance the inventories of dealers.

Under standard securitization terms, bonds backed by floorplan loans must begin amortizing ahead of schedule if the issuer files for bankruptcy. But investors are skeptical about the likelihood of such an orderly unwinding of the bonds, especially in light of the recent congressional attack on the bonus contracts that insurer AIG made with its employees before it came under the control of the federal government.

"The government thinks it can just unilaterally change any kind of contract out there," said a buysider.

Such concerns took a toll this week on the values of bonds backed by Chrysler Financial and GMAC loans to car dealers, with values of those securities slipping below 70 cents on the dollar.

This week, Bank of America and J.P. Morgan were working to make markets in GMAC's floorplan-loan bonds, offering to buy for as little as 68 cents on the dollar and sell for as much as 76 cents. Chrysler floorplan deals were out for bid in the mid-60s, an investor said. Most floorplan bonds have been downgraded amid falling auto sales.

On Monday, President Obama gave Chrysler 30 days and GM 60 days to develop recovery plans that would be worthy of further government support of the struggling companies. During that period, it would be difficult for the automakers to carry out a securitization, which would be more expensive than debtor-in-possession financing that could be lined up in a bankruptcy scenario.

A buyside professional said Chrysler and GM would need to offer prohibitively expensive credit enhancement to achieve the triple-A rating needed for an issue under the Federal Reserve's Term Asset-Backed Securities Loan Facility, and to be attractive to investors.

Still, one trader said it's possible at least one of the two companies will attempt a securitization, particularly with a new round of TALF financings expected next week. "That's why TALF was really created," the trader said, at the same time conceding that Chrysler and GM would pay a much higher price for a securitization now than they would have before the administration announced its willingness to carry out bankruptcy plans.

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