An important indicator of investor confidence in General Motors Corp. is at its highest level in almost two years.
“There is recognition GM has made progress and people are getting more confident,” Mark Oline, a Fitch Ratings analyst, told Bloomberg.
Prices on credit-default swaps, which have become a key barometer for the financial markets on credit quality, fell to $377,900 based on $10 million of GM bonds, well below the peak of $1.35 million at the end of 2005, according to Bloomberg.
Credit-default swaps enable traders to bet on a company’s ability to repay its debt. They were designed to protect bondholders by paying the buyer face value in exchange for the underlying securities should the company default. A decline suggests that the company’s credit risk has improved, and the risk of it filing for bankruptcy has declined.
To increase the company’s cash, GM sold $17 billion of assets over the last 15 months. The company may be due for its first debt ratings increase since 1998 and there’s just a 27 percent chance of a bankruptcy in the next five years, down from 68 percent in December 2005, based on swap prices and a JPMorgan Chase & Co. valuation model, according to Bloomberg.
GM Chief Executive Officer Rick Wagoner said new models have helped boost the company’s results by $1 billion in each of the first three quarters of last year, and that the company plans to increase capital expenditures this year.
The future
GM is committing almost $9 billion for new product development in 2007 to continue its string of producing high quality, well-received vehicles that the public wants to drive. New vehicles are expected to account for 40% of showroom sales this year.
Last year, GM introduced the Chevrolet Silverado pickup, Pontiac Solstice, Saturn Sky roadsters and other new products with curb appeal. GM is also winning prestigious quality awards, improving what had been a badly tarnished reputation.
Overseas markets hold much promise for GM as the world economy strengthens. Last year, 55% of sales were outside the United States. Asia, in particular, has seen rapid growth for GM. Since 2000, GM’s Asian assembly plants increased from five to 14, and sales volumes grew from 313,000 vehicles to 1,105,000. GM’s focus on emerging markets made it the leading band with a market share of 11% in 2006.
Though GM’s turnaround is impressive, it’s not complete. Resolving GM’s exposure to Delphi remains a top priority, structural costs need to be reduced further, earnings must continue to improve and both cash flow and market share need to stabilize.
GM’s domestic market share in 2006 was 24.2%, down 1.7% from 2005, and could fall further as it seeks to reduce less profitable fleet sales and concentrate on its retail trade. Adjusting to a global economy with strong foreign competition has been challenging for GM, as the domestic auto business has realigned. These changes, however, have brought opportunities in countries like China, India and Brazil. While GM has a way to go, 2006 showed a level of commitment and seriousness to righting its ship that surprised many.