June 12, 2009 / 7:35 PM / 8 years ago

General Motors CDS worth 12.5 percent in auction

NEW YORK (Reuters) - Sellers of protection against General Motors Corp’s bonds defaulting will need to pay buyers 87.5 percent of the insurance they sold, based on the final results of an auction held on Friday to determine the value of the automaker’s credit default swaps.

Credit default swaps on GM’s unsecured debt were valued at 12.5 cents on the dollar, while contracts protecting the automaker’s loans were valued at 97.5 cents, said auction administrators Creditex and Markit.

That means protection sellers on GM’s bonds will need to make payments of around $8.75 million per $10 million insured and sellers of protection on its loans will face payments of $250,000 per $10 million sold.

Credit default swaps are used to insure against borrowers failing to repay their debt.

GM filed for bankruptcy on June 1 in the third-largest Chapter 11 case in U.S. history after a majority of its bondholders agreed to exchange their debt for an ownership stake in the company.

When a borrower defaults, protection sellers pay buyers the sum insured minus the recovery value. Net volumes of around $2.4 billion are outstanding on GM’s debt, according to data by the Depository Trust & Clearing Corp, though it is not clear what percentage is based on the company’s loans and bonds.

The auction, involving 13 dealers, was the largest to be held in the $26 trillion credit derivative market since the failure of Lehman Brothers, Washington Mutual and Iceland’s three major banks -- Landsbanki, Glitnir and Kaupthing -- last year.

In most cases losses on GM’s contracts, which have traded at severely distressed prices since March, will have already been taken by protection sellers. This is because protection buyers typically require that collateral is posted against the contracts daily, based on their market value.

Reporting by Karen Brettell; Editing by Kenneth Barry

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