GM CDS hit record, price in 90 pct default risk

NEW YORK (Reuters) - Credit investors are pricing in a 90 percent chance that General Motors Corp may default on its debt in the coming five years, after the automaker on Friday posted a $15.5 billion loss for the second quarter.

The No. 1 U.S. automaker burned through $3.6 billion in cash in the quarter as it cut factory output by 27 percent in response to an accelerating downturn in its home market that has hammered sales of trucks and sports utility vehicles.

GM executives declined to say how much cash the automaker expects to burn in the second half of this year but said it needs a minimum of $11 billion to $14 billion to run its global operations. For details click on.

Credit default swaps costs jumped to a record of 45.5 percent the sum insured as an upfront payment, from 42 percent on Thursday, in addition to 500 basis point annual payments, according to Phoenix Partners Group. This means it would cost $4.55 million to insure $10 million in debt for five years, plus an additional $500,000 each year.

A cost of 45 percent upfront implies a 90 percent default probability, said Gary Kelly, director of research at Tradition Asiel Securities in New York. "From a credit market perspective GM is going to have to restructure or default," he said.

The automaker's 8.375 percent bonds due in 2033 dipped to 46 cents on the dollar, an all-time low in the institutional market, before bouncing to 47.5 cents, according to MarketAxess. They closed on Thursday at 49 cents.

GM ended the second quarter with $21 billion in cash and $5 billion in undrawn credit. It has since drawn down a revolving loan facility by $1 billion.

COST CHALLENGES

Shelly Lombard, analyst at independent research company Gimme Credit, said she sees a 25 percent chance GM could default in the next two years.

"They are blowing through $3 billion of cash a quarter and the next two quarters are going to be critical to see if they can stem the tide," she said. "If they can get their costs in so that they won't go through their cash quite as fast."

GM said its North American sales fell 20 percent, but sales increased by 10 percent outside of North America.

"They are selling cars over there, but profit margins are not enough to compensate for the amount of money they are losing in North America. I did not expect them to lose so much on the operating side," Lombard said.

Standard & Poor's on Thursday cut its ratings on GM deeper into junk territory, but said it views the automaker's liquidity as "adequate for now."

The rating agency cut GM's senior unsecured debt one notch to "B-minus," six steps below investment grade, and gave it a negative outlook, indicating its likely direction over the next two years.

The negative outlook "reflects our expectation that current liquidity levels could be almost halved by cash losses in 2008 and 2009, sinking to dangerously low levels if management's cash-saving actions or capital-raising activities fall well short of plan," S&P said in a statement.

(Reporting by Karen Brettell and Anastasija Johnson; Editing by Leslie Adler)