Trouble in Motor City

If what's good for General Motors is good for America, as one GM chairman suggested a half-century ago, then what's bad for GM can't be good for GM bondholders. Or can it? Steady selling has pushed up yields on some GM bonds as high as 12%. At about four percentage points above the average junk-bond yield, that's awfully tempting. But it also suggests that GM bonds are extraordinarily risky.

GM and rival Ford are swimming in red ink. GM lost $1.6 billion from operations in the third quarter, and Ford, $1.3 billion. The automakers are bedeviled by intense competition, high labor costs, declining market share and an inability to wean buyers from incentives. High fuel prices are dampening enthusiasm for expensive sport utility vehicles. And GM could be on the hook for up to $12 billion in benefit liabilities for workers who retired from Delphi, its former parts unit, which recently filed for bankruptcy protection.

Some analysts speculate that GM itself might take the Chapter 11 route, but for now the credit-rating agencies think that's a long shot. Although GM's bonds are deep in junk territory (Standard & Poor's rates them BB-), they're still well above the triple-C rating that SP usually gives to companies it fears are on the verge of bankruptcy. (SP rates Ford bonds BB+, the highest junk grade.)

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If GM bonds look too risky, the debt of its finance unit, General Motors Acceptance Corp., might make sense. A GMAC bond due in 2014 recently yielded 7.6% to maturity. SP rates GMAC debt BB, but GMAC's bonds are seen as considerably safer than those of GM because, among other reasons, they are backed by customer loans. GM says it plans to sell the majority of its finance unit, which could result in a ratings upgrade for GMAC. That would almost surely result in higher prices (and lower yields) as managers of high-grade bond funds snap up GMAC debt.