June 26, 2008 / 4:06 PM / 11 years ago

GM, Ford debt protection costs hit records

NEW YORK (Reuters) - The cost to insure the debt of General Motors Corp (GM.N) and Ford Motor Co (F.N) hit record highs on Thursday on concerns about the liquidity of the sector.

Stock options protecting against a drop in GM’s share price were also actively traded.

Automakers have been burning through cash as they restructure their operations, while plummeting sales of vehicles is delaying their recovery.

Goldman Sachs on Thursday downgraded GM to “sell” from “neutral,” saying cash flow burn may cause it to look to raise capital. Goldman also cut its price target on Ford to $5 from $8.

“It appears that everything has gone wrong: High fuel prices, rising steel prices and the consumer cutting back,” said Jon Najarian, founder of Web information site optionmonster.com.

The cost to insure GM’s debt with credit default swaps rose to a record 31.5 percent upfront, or $3.15 million per year for five years to insure $10 million in debt, plus annual payments of 500 basis points, according to Markit.

Ford’s swaps increased to 29.5 percent upfront, plus 500 basis points annually.

More than 75,000 puts have already traded in GM during the first 1-1/2 hours of trading on Thursday, said Najarian. That is more than double the average daily put volume in May of 37,000 contracts.

“I think people are buying puts to protect their stock and/or bond positions in GM,” Najarian said.

Fitch Ratings on Wednesday cut GM’s debt rating deeper into junk status.

Automakers are struggling with a deepening slump in sales amid a consumer exodus from trucks and sport utility vehicles. Standard & Poor’s last week also said it may downgrade Ford and GM.

GM’s 8.25 percent bonds due in 2023 fell to 60 cents on the dollar, down from 63 cents at Wednesday’s close, according to MarketAxess.

Ford’s 4.25 percent bonds due in 2036 fell to 75 cents on the dollar, down from 79.25 cents on Wednesday, according to MarketAxess.

Reporting by Dena Aubin, Doris Frankel, Anastasija Johnson and Karen Brettell; Editing by Jonathan Oatis

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