GM spreads risk further widening on strike

By Karen Brettell

NEW YORK (Reuters) - General Motors Corp's credit spreads are likely to face further weakness if striking auto workers stay off the job, however resolution of the strike may also lead to spreads ratcheting tighter.

United Auto Workers (UAW) union-represented employees walked off the job, and organized pickets outside General Motors plants, after the union called the first nationwide strike against the top U.S. automaker in 37 years, in the wake of contract talks failing.

"The strike is certainly not a token strike," as workers are striking nationwide, said Brad Rubin, auto sector specialist at BNP Paribas in New York.

The cost to insure GM's debt with default swaps rose, after an earlier fall, to around 552 basis points, or $552,000 per year for five years to insure $10 million in debt, from around 507 basis points at Monday's open.

"I think that they are using their last chip to try to get something better than what GM's trying to show them," Rubin said.

"(GM) can weather this storm for about 30 days," Rubin said. However, "we think it will last around 2 to 5 days, in which case we see CDS widening and equity devaluation as well."

Swaps are likely to rally into the mid-400 basis point area when an agreement is reached with the union, Rubin said. However, "if there is still no resolution Monday then I think that the alarm sounds certainly, from investors and unions and everyone."

If the strike lasts a week it would indicate that "there are some real sticking points here," said another analyst who declined to be named.

However, GM is unlikely to have liquidity problems as a result of this strike, the analyst added.

VEBA

GM and UAW negotiators had agreed during the weekend to the broad terms of a deal that would reduce GM's annual health-care costs, people briefed on the talks said.

Under that plan, GM would shift responsibility for retiree health care to a new UAW-aligned trust fund known as a voluntary employee beneficiary association, or VEBA. Wall Street analysts have said establishing a VEBA could cut GM's annual costs by $3 billion in exchange for a one-off payment expected to top $30 billion.

However, the VEBA agreement is not the panacea for GM, analysts said.

"Many were touting a health care VEBA as 'the solution' to GM's problems," Gimme Credit's Lombard said, however "GM needed more than just a health care deal to close the gap between its EBITDA (earnings before interest, taxes, depreciation and amortization) and its cash needs."

"Although a strike is definitely negative, it's a positive that GM realizes it needs more and isn't willing to trade everything, including other types of labor savings, just to reach agreement on a VEBA," she said.