Monday, April 13, 2009

Thoughts On The Upcoming Auto Sector Implosion

As the GM and Chrysler bankruptcy is now a matter of weeks if not days (if one listens to CNBC "it is all priced in") I could not help but wonder just what the fallout of a bankruptcy would be on security holders in the structured realm. And any such consideration would have to take into account the potential fall out from the OEs but also within the entire supply chain (which few are talking about on prime time TV). The most impacted parties in question, of course, are not common shareholders who have taken their beatings, but the corporate synthetic collateralized debt obligations, which not only have their survival to worry about on a day to day basis, but now have to consider what the "out of left field" implications would be from a rolling default among the entire autoproduction vertical (not to mention just how/where CDOs mark their appropriate books with regard to a plethora of impaired securities).

Moody's has some interesting observations on the topic.

Even though CDOs maintain only small exposures to the two troubled automakers, there may be collateral damage as the bankruptcies ripple through the U.S. auto industry. Our CDO ratings, however, are unlikely to be significantly affected because of previous, forward-looking changes to our rating assumptions and stress tests.

CDO exposure to Chrysler and GM is not large. Of 2,262 Moody’s-rated CDOs, none have exposure to Chrysler. Some 10% have exposure to GM, of which the average amount is 1% with a range from 0.25% to 2.45%. Pro forma model analyses suggest that ratings of more than two thirds of exposed CDOs will be unaffected even if CDS settlement amounts approach 100%.

Nevertheless, there may be collateral damage from a bankruptcy. A GM bankruptcy may worsen the credit position of some GM affiliates, such as General Motors Acceptance Corp. (GMAC) or Residential Capital LLC (ResCap). Similarly, the credit effect on suppliers (e.g., Visteon ) or users (e.g., Hertz ) would be negative. Even competitors may suffer, possibly as an unintended result of government intervention, from effects that impede their competitiveness, cause the loss of mutual suppliers, or further harm consumer confidence.

CDO exposures to the U.S. auto industry, in general, are more significant than just for Chrysler and GM. Nearly 25% of all CDOs have some exposure to U.S. autos, and of those with exposure, the average exposure is 5.2% with a range from 0.2% to 24%. The chart below shows exposure across all Moody’s-rated CSOs to the top 20 U.S. auto industry companies.

For all practical purposes, it is still likely early to draw full conclusions, save to say that there will be significant losses across all CDOs classes. And abusing Melissa Francis' favorite term "second derivative", one can only speculate what the downstream effects of material CDOs impairments will be to leveraged parties who own these securities directly or indirectly.

Bottom line is, while the outcome for GM's common stock is rather binary at this point with all signs pointing to $0, the full impact of the Detroit implosion will likely be much more pronounced than the shallow talking heads on TV vouch it will be. Sphere: Related Content
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Anonymous said...

anyone has an idea of how much single name CDS will the

Anonymous said...

This news is weighing heavy on Wall Street today along with banking earnings reports out in the distance. I see that the talk is spinning trying to minimize the damage that such a bankruptcy will immediately have on the economy.

Of course none of this news is helping the dollar today. China is buying less of our debt and so a number of investors look to be hedging from the way gold is reacting today. ExactPrice is showing it up to $894 right now. Platinum also way up. Which probably is a good sign for the auto industry long term as it's a key metal for the catalytic converters.