Credit-Default Swap: You Want How Much?

Bloomberg Article on Credit-Default Swaps

"The cost to protect GM's debt rose to a record. Credit-default swap sellers demanded 27.5 percent upfront and 5 percent a year to protect GM debt from default for five years, according to CMA Datavision. That's up from 24 percent initially and 5 percent a year yesterday and means it would cost $2.73 million upfront and $500,000 annually to protect $10 million in debt."

Holy Cow! To take some perspective, a year ago a credit-default swap (CDS) seller would have asked you for $400,000/year with no upfront (according to wsj article) to insure $10,000,000 in GM bonds. To see an insurance policy jump from $2 million for 5 years to $5.73 million in just one year is rather staggering when you think about it. The other domestic manufacturers aren't that far off, either. Ford, for example, has an upfront of 24.75 percent.

Given the dismal stock performance of Ford and GM and indicators like the soaring cost of credit-default swaps, folks have asked me what I think of the domestic makers' chances. Reading the tea leaves isn't easy, because just when you start to study the situation things get shaken up again.

I'm very keen to hear what Ford has to say in July. If it announces, as expected, that they will move extremely aggressively to phase slow selling model production and convert those plants to produce fuel sipping Euro-products, then I think it has a chance. A product like the E-Series van should make way for the Transit. Having both the Transit and its already announced little brother the Transit Connect could be a great one-two punch for Ford. Just look how well the Sprinter has done for Dodge. We know already that the Fiesta and next-generation Euro-Focus are headed here. How about bringing the C-Max and Kuga along with them? Mercury seems to be a goner. I'm on the fence about Lincoln. The brand seems to be showing some life, but there isn't anything in the product portfolio that makes me long to own one. I like Alan Mulally and the team that he has assembled. Ford has leveraged everything, so it will be make or break over the next few years.

On the General's side, a new line of efficient vehicles like the Cobalt replacement and Chevrolet Beat (almost a lock for the US market) will help GM's volume brand. A new, Euro-packaged 7 seater people mover for Chevy could also help out Team Volt. All of that is well and good for the bowtie division, but what of the other brands? Pontiac is caught in a difficult position as its intentions to be a more performance, RWD oriented brand could be shunted by production changes. Could products like a rebadged Aveo hurt the brand more than help it? What if GM dropped a direct-injected, turbocharged mill into a RWD, mid-sized Alpha based vehicle? For GMC how long can the veneer of mostly badge engineered cars hold up? Buick has shown some hope with the Enclave, but I'm not sure how many younger buyers could ever be convinced that it's okay to drive a Buick. Cadillac is the real success story. Anybody even remember when they fudged the sales numbers to stay ahead of Lincoln? The CTS sedan shows the way and with a wagon and coupe on the horizon it will have a great lineup. Can the STS/DTS replacement do the same thing for the other end of the lineup? Does the General have enough resources for its other divisions? I'm not sure. If a buyer can be found for Hummer, then it must go. Perhaps the brand can be re-cast, but GM can't keep so many plates spinning. Let someone else fix it. If GM stays the course with Saturn and continues to mold it as a Euro-brand with American touches, then it may be able to make it. I still think it needs a stronger warranty or free maintenance to separate it from its sister divisions. Saturn also needs a lot of marketing dollars to get the word out. As for Saab? I love the brand, but how long can GM continue its life support? One scenario I see is a buyer scooping up Volvo and Saab and combining them into one super-Swedish brand.

Privately held Chrysler is in the worst shape. For starters Chrysler needs to get its initial quality numbers up and continue to improve its interiors. The only magic I foresee happening at Chrysler is if it can use the power of partnerships to make use of its capacity. Building a truck for Nissan and getting a small car in return is a great way to start. Selling some extra capacity to Fiat/Alfa would also be a great move. Could Chrysler also partner with a Chinese or Indian firm to manufacture products at its facilities? Maybe so. There's not much to talk about in the way of future product, so we'll just have to wait and see what they have up their sleeves.