Path: bloom-picayune.mit.edu!snorkelwacker.mit.edu!americast.com!americast.com!americast-post Newsgroups: americast.ibd From: americast-post@AmeriCast.Com Organization: American Cybercasting Approved: americast-post@AmeriCast.com Subject: \TITLE Date: Mon, 9 Nov 92 12:21:57 EST Message-ID: <7.1992Nov9.122158@AmeriCast.com> 11/9/92 TITLE #m#gmrama#m#Are Chrysler's Bonds Best Of Big Three? Bernice Napach In New York Forget GM for the time being. Consider Chrysler if you have the stomach for junk. Or buy Ford paper if you want to minimize risk, but remember, the gains will be limit- ed also. Such is the consensus of portfolio managers on the bonds of the Big Three automakers. General Motors Corp.'s bonds, not surpris- ingly, have dropped sharply in price in recent weeks as the com- pany continues to suffer the throes of a massive reorganization designed to restore profitability. Differentials have widened about 40 basis points to 160-200 basis points above Treasury securities with equivalent maturities in the past week. GM's debt and that of several affiliates have been put under review for a potential downgrade by the major ratings agencies. GM's debt is currently rated A- by Standard & Poor's Corp., and A2 by Moody's Investors Service Inc. GM last week halved its 40-cents-a- share dividend, which will save the nation's largest automaker about $500 million a year. It also completed a manage- ment shakeup that had been brewing for weeks. Standard & Poor's said the management changes indicate "the inadequacy of previous plans for improving the competitiveness of GM's core North Ameri- can automotive operations and raises the specter that costly and potentially disruptive additional restructuring measures will be necessary." GM has lost about $7.4 billion since January 1990, including $752.9 million lost in the third quarter of this year on sales of $29.4 billion. The company suffers from sluggish car sales in North America, expensive manufacturing costs for cars, an underfunded pension fund and the specter of more work disrup- tions by the United Auto Workers, whose contract with the Big Three expires in September 1993. Investors willing to take on the corporate troubles of GM are not being paid enough for the risk because the downside appears to be a black hole while the upside is limited, according to portfolio managers. Are Chrsyler's Bonds Best Of Big Three? "We've probably not seen the end of the bad news at GM," said Larry Hill, portfolio manager at IAI Bond Fund in Minneapolis. "It's a bad combination: a nervous market, a lot more sellers than buyers and a company that will be selling new issues - all causing spreads to widen," Hill said. The situation is exacer- bated by the enormous amount of GM debt outstanding - $86.2 bil- lion including the debt of related entities. Debt Upgraded "Everyone owns their paper. If there are more holders, then there are more sellers on bad news," Hill said. In contrast to GM, the future of Chrysler looks relatively bright. Its debt, though still rated below investment grade, was recently upgraded a notch by Moody's to B1 for Chrysler Corp. and to Ba2 for Chrysler Financial Corp. The company's new line of L-H cars - full-sized vehicles now arriving in the showrooms - is receiving good no- tices. And Chrysler's sales of light trucks -utility vehicles like Jeep Cherokees and minivans - remain brisk. "The outlook for Chrysler is positive," said one analyst. "The direction of the credit is improving, and expectation is that Chrysler will continue to enjoy good sales in cars, light trucks and utility vehicles." "Chrysler has gone to the brink. It has downsized, fi- nanced new products and is improving," said Hill at IAI. Chrysler bonds currently are trading at about 375 basis points above Treasuries of equivalent maturities, but their prices have jumped sharply in the past 18 months. For example, long-term bonds that financed Chrysler's Auburn Hills, Mich., technology center, due May 1, 2020, have jumped to $1,260 as of Nov. 2 from $829.70 per $1,000 a year earlier - a 50% profit. There is still money to be made in Chrysler debt, assuming an upgrade of the credit some time in the future, but probably not as much as was made in the past 11/2 years. Chrysler earned $202 million, or 62 cents a share, in the third quarter, on sales of $9.2 billion. It faces a severely underfunded pension fund, but made a token con- tribution to the fund of about $300 million in the last quarter. For investors who don't have the stomach to buy below investment grade debt like Chrysler but who prefer putting some money into the auto sector, Ford Motor Co. could be the ticket. "Ford is coming out with new models, though not as fast as Chrysler," said Mark Altherr#m#cq??#m# at Salomon Brothers Inc. "It now has the new Lincoln Mark VIII and is already working on replacements for current successful models like the Explorer (another utility vehicle) and minivans. Ford will do better as car sales in- crease." But Europe, in the throes of a recession, is a problem for Ford and GM, which both have manufacturing and sales operations there. An analyst at the Strong Funds advises investors planning on buy- ing Ford debt to pay close attention to GM debt. If the spread of Ford securities to Treasuries widens because of problems with GM, as is currently the case, Ford paper becomes a good, relatively cheap buy. Investors "won't make much in Ford, but won't lose much either," said John Geissinger at the Putnam Cos. in Boston. Ford lost $159 million in the third quarter on sales of $23.3 billion. In addition to the debt of these auto companies, investors also might consider the debt of their related entities, which include the financing arms for car purchases, like GMAC (General Motors Acceptance Corp.), Chrysler Financing Corp. and Ford Financial Group as well as shares in the pools of auto loan receivables. One of the advantages of the latter, according to John Dunlevy at Hyperion Capital Management, is its AAA rating. This article is copyright 1992 Investors Business Daily. Redis- tribution to other sites is not permitted except by arrangement with American Cybercasting Corporation. For more information, send-email to usa@AmeriCast.COM