GM to plug pensions hole via $10bn bond

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GM to plug pensions hole via $10bn bond

By Jenny Wiggins and Adrienne Roberts

Financial Times, June 22, 2003

General Motors' surprise $10bn bond deal, expected to be sold this week, is being awaited warily by fixed- income investors who are cautious about taking on too much auto debt.

The motor manufacturer will sell $10bn of debt in the unsecured and convertible debt markets to help fund its large pension deficit. Meanwhile, General Motors Acceptance, GM's financing subsidiary, will sell an additional $3bn.

The bond sales come amid one of the fastest corporate bond rallies on record. The value of auto debt, which fell sharply last year, has risen as investors have sought high-yielding securities. Meanwhile, interest rates have dropped to 45-year lows, making it relatively cheap for companies to issue paper - including junk bond issuers like Xerox, which last week sold $1.25bn in debt.

But while GM's bond sales are expected to satisfy some yield-hungry investors, others remain worried about the financial outlook for vehicle manufacturers and will not be buyers.

"Do we, in our heart of hearts, want to lend to GM for 15 years? I don't think so. Pricing may affect that, but there are a lot of risks," said Dennis Gould, head of UK fixed-income at Axa Investment Managers in the UK, which has about £21bn ($35bn) in fixed-income funds under management.

"The way the market is, the paper will probably get gobbled up. But I can see us letting it pass us by."

Credit ratings agencies are also sceptical about the ability of the bond markets to absorb large amounts of auto debt. "Given the size of the proposed financings, unsecured debt market appetite for GM-related debt issues could be limited for a period, constraining GMAC's funding flexibility," Standard & Poor's said.

Investors fear that GM is shifting, rather than solving, its problems by replacing one liability (pensions) with another (debt). "I don't think issuing debt is a solution to solving the pension problem," said Lou Zahorak, senior portfolio manager at Barclays Capital.

At the end of last year, GM's pension plans were underfunded by $19.3bn. Although the bond deal will help GM's liquidity by replacing some of its near-term pension obligations with long-term debt payments, the company is still stuck with a large pension liability.

Suki Mann, head of credit strategy at SG Investment Banking, said: "Credit must be given to GM for recognising the difficult market outlook and proactively funding its pension deficit. However, it also illustrates the sheer scale of the problems facing the company - and Ford, for that matter."