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Transportation equipment industry

Hedge Funds and Banks Face Combined Losses of Over $32 Billion

Strategic Insights

— 1 min read

Hedge funds and banks are on the cusp of absorbing staggering losses following the downgrades of General Motors and Ford, with combined losses estimated at more than $32 billion. The downgrades, carried out by Standard & Poor's on May 5, have led to a significant deterioration in the market value of the two companies' debt. Deutsche Bank analysts have calculated that the total loss on GM debt since the start of the year stands at $17.8 billion, while the capital value of Ford's debt has fallen by almost $14 billion.

Key Takeaways:

  • Deutsche Bank estimates that the total loss on GM debt since the beginning of the year is $17.8 billion, while the capital value of Ford's debt has fallen by almost $14 billion.
  • The combined losses of hedge funds and banks are estimated at over $32 billion ($18 billion in pounds).
  • The downgrade of GM and Ford's long-term debt to junk status by Standard & Poor's on May 5 has led to a significant increase in the yield premium of Single-B bonds, which has widened by almost 7 percentage points from February 2003 to March.
  • The market losses for GM and Ford bond investors characterized by Gary Jenkins, a credit analyst at Deutsche Bank, as a "default by stealth".
  • Jenkins pointed to the Russian debt crisis in 1998 and the time lag before problems emerged at Long Term Capital Management, the hedge fund, as a precedent for the potential scale of the losses.
  • Neither Ford nor GM is insolvent, but the absence of any sign of distress from leading investors should not be misread.
  • The full scale of the collapse in corporate bond markets has yet to be revealed.

Statistics:

  • Total loss on GM debt since the beginning of the year: $17.8 billion (Deutsche Bank estimate)
  • Capital value of Ford's debt fallen by: almost $14 billion (Deutsche Bank estimate)
  • Combined losses of hedge funds and banks: over $32 billion ($18 billion in pounds)
  • Yield premium of Single-B bonds widened by: almost 7 percentage points from February 2003 to March
  • Time lag between August 1998 Russian debt crisis and credit markets feeling full effects: 2 months (Pointed out by Gary Jenkins)
  • Capital value of Enron creditors owed: $10 billion

Sources:

  • Deutsche Bank credit analysts
  • Standard & Poor's
  • The Times (Copyright (C) 2005)

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