GM share price fall raises questions for bond market

Its share price continued to fall towards the end of the week. The company expects a first quarter loss of $850m (£442m), equivalent to $1.50 per share.

GM has a total outstanding debt of $301bn at the end of 2004 and credit ratings have been downgraded on the back of the announcement. S&P changed its rating from BBB to BBB minus for the company’s long-term debt.

The spread in the yield curve between government bonds and corporate bonds has gradually narrowed over the past three years. Companies are generally more cash-rich as a result of cost-cutting exercises and hence credit ratings have improved. But there is a debate over whether GM’s announcement could be the first sign of weakness in the corporate bond markets.

Jim Leaviss, M&G head of retail fixed interest, says: “Spreads in GM’s long-term bonds have widened from about 350 to 500 basis points since the start of the year. Investors are beginning to see GM as a high-yield company. A move down to junk status may see a big sell-off as investors in investment-grade bond portfolios divert money away from the company.”

Leaviss says that high input costs and rising commodity prices have contributed to GM’s poor performance: “There was not much of a rally in the Treasury markets and it is unclear whether or not this is the start of a bear market. It looks like the market is isolating GM.”

Nigel Sillis, head of credit research at Barings Asset Management, says: “The fundamentals of American corporates are strong. Balance sheets have been repaired and there is strong structural demand for bonds. GM has got itself into a shocking state. It is uncompetitive and is losing market share. What happened is very stock- specific and has only had an effect on the American auto-supply industry.”

Sillis adds that if GM did fall to junk bond status, there could be a dislocation in the yield curve.

Perhaps this is an isolated incident and the rest of corporate America is in good shape. But with uncertainty surrounding oil prices, interest rates and the level of its twin deficits, the corporate bond market may react more aggressively the next time bad news is announced from America’s corporate giants.