NYU's Altman sees 50-55 percent chance of GM default

By Dena Aubin

NEW YORK (Reuters) - General Motors Corp GM.N, bruised by multi-billion dollar losses, has a 50 percent to 55 percent chance of defaulting on its debt over the next five years, default expert Edward Altman told the Reuters 2008 Restructuring Summit this week.

A bankruptcy filing may be the best option for GM to protect its assets and further reduce costs, said Altman, professor of finance at New York University's Leonard L. Stern School of Business.

"If we have a global recession, you know autos are going to get hit and get hit hard, not just GM, and it's looking more and more like a global recession," Altman said.

GM spokeswoman Renee Rashid-Merem said, "We've been very clear that bankruptcy is not something that we're considering." She also said the company has a very solid plan in place to bolster liquidity by $15 billion.

GM's Chief Executive Rick Wagoner said on Thursday that September U.S. auto sales were running about flat from August but held out hope that a government loan package, tax breaks and a banking bailout all pending in Congress would help loosen credit and support demand.

In a move to shore up reeling automakers, the U.S. House of Representatives on Wednesday approved a measure to provide up to $25 billion in government loans, with Senate passage expected to follow soon.

Through August, GM's sales had declined for 10 straight months, the longest downturn since the 2001 recession, as high gas prices cut into demand for its trucks and sport utility vehicles.

Altman's default estimate on GM was derived from his Z-Score, a widely followed formula he developed 40 years ago for predicting corporate bankruptcies. The Z-Score suggests GM has an implied rating of "CCC-minus" or lower, one of the last rating categories above default.

Some studies have shown an accuracy rate of more than 80 percent for the Z-Score.

GM's Z-Score has been in a "distressed" zone for years but lost more ground after the automaker in August posted a $15.5 billion second quarter loss. Its score fell to minus 0.07 after that loss, down from 0.52; any score below 1.8 indicates distress.

The credit derivatives market also reflects growing pessimism about GM. The automaker's credit default swap spreads are pricing in a 100 percent probability of default, according to Tradition Asiel Securities, a New York broker dealer.

"We continue to wonder how GM will continue to remain in business given the tough credit markets and GM's aggressive cash burn," the firm said in a research note on Friday.

Credit derivatives have been pricing in a 90 percent or greater chance of a GM default since July, according to Gary Kelly, director of research at Tradition.

Michael Psaros, co-founder and managing partner of private equity firm KPS, told the Restructuring Summit GM will likely pull through, however.

"I really believe, as they refocus their fleets on passenger cars at the right price point, that Americans will start buying more of their cars," Psaros said.