Prepackaged bankruptcy could trigger GM CDS: analyst

NEW YORK (Reuters) - Around $4 billion in payments on credit default swaps protecting General Motors Corp may need to be made if the automaker enters into a prepackaged bankruptcy, though any payments are unlikely to cause widespread losses, Bank of America said on Friday.

U.S. lawmakers are considering several options to help General Motors, Ford Motor Co and Chrysler LLC, which have collectively asked for $34 billion in federal aid.

At a Senate Banking Committee hearing on Thursday, committee members discussed options including a prepackaged bankruptcy, assistance to automakers from the Treasury Department's $700 billion Troubled Asset Relief Program (TARP) or giving short-term funding help.

"For autos credit default swaps (CDS), perhaps what matters most is not what happens to autos, but how it happens," Bank of America analyst Glen Taksler wrote in a report.

"An autos bailout without a bankruptcy filing could cause CDS to rally substantially, even if bondholders voluntarily exchange into new bonds with a lower par amount," he said.

"A similar exchange through a prepackaged bankruptcy would trigger CDS contracts, and for GM Co., would result in an estimated payment of about $4 billion in principal from protection sellers to protection buyers," he added.

Credit default swaps on General Motors, and its finance arm GMAC LLC, have been trading at distressed levels since March as concerns grew that the automaker would be unable to turn around its business before running out of cash.

The cost to insure GM's debt has surged to an upfront cost of 80 percent the sum insured, or $8 million to insure $10 million in debt for five years, in addition to annual payments of $500,000, according to Markit.

The swaps had traded at a spread of 716 basis points at the beginning of the year, indicating it would cost $726,000 per year for five years to insure $10 million in debt.

If payments on GM's swaps are triggered, they are unlikely to have systemic consequences as most of the losses have already been taken as the securities weakened.

"CDS contracts require daily posting of mark-to-market collateral posting," Taksler said. "Given that auto company bonds already trade in the $20s, the additional collateral posting prompted by a potential bankruptcy should be fairly small."

By contrast, if GM looks like it will avoid bankruptcy, CDS on the company could rally significantly, leading to the need for large adjustments in the value of the contracts by buyers of protection, he added.

(Reporting by Karen Brettell; Editing by Tom Hals)