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© Financial Times

This article is provided to FT.com readers by Debtwire—the most informed news service available for financial professionals in fixed income markets across the world. www.debtwire.com

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General Motors bonds, once an exclusively distressed debt play, have emerged as one of the most actively traded proxies for investors betting on a broader economic recovery, a trader, three sellside analysts, and three buyside sources told Debtwire.

The volume and frequency of trades in the stub-debt left over from GM’s bankruptcy soared since the beginning of the year, according to data from MarketAxess. Weekly volume in the benchmark USD 3bn 8.375% notes due 2033 hovered between USD 100m and USD 200m per week in 1Q09 before spiking to USD 600m in the first week of April.

Trading then slackened off a bit, but in the past three weeks, activity ranged between USD 600m and USD 1.1bn, according to MarketAxess. The bond rallied from 29.50 in late February to 38 by the end of March and has since spanned a 32-39 range, closing at 34.75 today.

Equity-focused funds contributed the bulk of the new liquidity as distressed players took the opportunity to exit, said the sellside analyst and the trader. Holders of bonds don’t receive coupons, but when GM executes an IPO they will be entitled to 10% of the float plus warrants for an additional 15%. That makes the instruments more of an equity option than a high-yield bond, both in terms of payoff and volatility.

The 8.375%s are only one of the USD 27bn in securities that were left in Chapter 11 when the new GM emerged through a 363 sale in July 2009. Recovery values for the bonds depend on when GM executes the IPO, how the new equity performs in the market and when a bond holder decides to cash out of the investment, said the second sellside source.

Estimates from various sellside research reports peg the recovery value in the mid-30s to mid-40s, with buy recommendations across the board, the second sellside source said. Estimates for the company’s EBITDA vary from a conservative USD 12bn in 2011 to a more bullish USD 15bn, said the source.

A GM spokeswoman said the company will IPO when the conditions are right and declined to comment further.

Aside from the company’s quarterly earnings, the main driver of the bonds price is the seasonally adjusted annual rate of vehicle sales, all the sources said. GM reports the number of cars it produces and sells on a monthly basis, providing investors a relatively regular flow of information to work into models, the sources said.

GM sold a total of 183,091 vehicles in April through its four brands, a 20% increase from the same month last year. Year-to-date the company has total sales of 652,444 vehicles, a 31% increase over the sales of the four brands last year, according to a company release. The company posted USD 31.5bn of revenue and USD 865m in net income for 1Q10, compared to revenue of USD 22.4bn and a net loss of USD 6bn in the same quarter last year, according to a company release.

Other factors such as consumer sentiment and raw material costs weigh heavily on the company’s earnings as well, making GM as good an indicator as any of US macroeconomic health, all the sources said.

GM’s ascendance as a proxy play marks a shift for high-yield bond markets as mega-LBOs such as HCA, Energy Future Holdings (TXU) and First Data (FDC) played that roll in recent years. And while there are other liquid credits that are just as tied to the broader economy, such as TXU or even rival automaker Ford, bonds backing those companies are fixed income securities that pay out regular coupons and are valued differently, said the second sellside source said.

A GM spokesperson did not return calls.


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