GM's Wagoner, Wilbur Ross Revive the Auto-Bond Market (Update1)...

Oct. 25 (Bloomberg) -- Auto-company bonds are rebounding from their worst performance in five years after General Motors Corp. Chief Executive Rick Wagoner reduced his company's health- care costs and billionaire investor Wilbur Ross said he planned to buy parts makers.

Junk-rated auto bonds are up 6.9 percent since Wagoner's announcement Oct. 17 of union concessions and the sale of a controlling interest in GM's finance unit to restore its investment-grade rating. Ross that day said he planned to combine bankrupt parts makers, easing concern carmakers may have to bail out suppliers.

``The rally is absolutely huge,'' said Andrew Cestone, chief investment officer of high yield at Philadelphia-based Deutsche Asset Management, which manages $5 billion in junk bonds. One General Motors Acceptance Corp. bond issue was Cestone's biggest holding as of June 30. ``There's probably no more significant a rally in a single name'' this year, he said.

The $558 billion auto-bonds market dropped after Standard & Poor's reduced ratings for Detroit-based GM, the world's largest carmaker, and Ford Motor Co. to junk status. The bonds fell again after Troy, Michigan-based Delphi Corp., the largest U.S. auto- parts maker, filed for bankruptcy protection. Auto companies have more debt than any other industry in the $5 trillion corporate bond market and the rally may help lower their borrowing costs.

The finance units of GM and Dearborn, Michigan-based Ford are the two best performers during October in high-yield and investment-grade indexes, according to Merrill Lynch & Co. Ford Motor Credit Co. was the only one of the 50 biggest investment- grade issuers whose bonds didn't lose money this month.

The low point for the industry came when auto-supplier and former GM unit Delphi filed for bankruptcy on Oct. 8 after Chief Executive Steve Miller said he couldn't get financial aid from GM. The United Auto Workers Union also wouldn't agree to cut pay for long-time workers to as little as $10 an hour.

High-yield auto bonds were down 10 percent this year through Oct. 14 amid a drop in market share and losses at GM and Ford.

Ross, who now heads buyout firm WL Ross & Co., in the late 1980s and early 1990s reorganized bankrupt companies as a senior managing director at investment bank Rothschild Inc. He worked on the debt reorganizations of Eastern Airlines Inc., Orion Pictures Corp. and Drexel Burnham Lambert Inc.

Local delegates for the UAW, GM's largest union, on Oct. 20 approved increases in retirees' out-of-pocket health-care expenses and a future $1 an hour pay cut for active workers.

Sprinzen on May 5 became the first credit analyst to cut the debt of GM and Ford to below investment grade.

Merrill on Oct. 18 raised its recommendation on the debt of GM's finance unit to ``overweight'' from ``marketweight'' on the decision by the automaker to sell most of GMAC.

Junk-rated auto bonds gained 4.6 percent between Oct. 14 and Oct. 21, the best weekly performance in 2005, cutting the industry's losses for the year by more than half to 3.8 percent as of yesterday. Junk-rated auto bonds represent 10 percent of Merrill's broadest index for the $1 trillion high-yield market.

``The fact that the UAW made concessions before the contract expires is very significant'' and is good for auto bonds, said Ming Shao, senior portfolio manager at DuPont Capital Management, which oversees $5.5 billion in fixed-income including GMAC and Delphi bonds from Wilmington, Delaware.

GMAC's 8 percent bond due in 2031 is the best-performing corporate bond in October over $150 million outstanding. The security soared about 19 cents to its highest price since March at 107.4 cents on the dollar as of 9:14 a.m. in New York, according to Trace, the bond price reporting system of the NASD.

The yield, which moves inversely to the bond's price, plummeted 2 percentage points to 7.4 percent. The price was as low as 79 cents on May 5, yielding 10.3 percent.

``If management follows through with their plans, this is absolutely a turning point for GMAC,'' Deutsche Bank's Cestone said. Funds managed by Deutsche Bank owned 1.2 percent of the $4 billion GMAC 2031 bonds as of June, regulatory filings show.

Car companies, and auto bonds, have staged comebacks before. Chrysler Corp., its bonds trading at 29.5 cents on the dollar, needed $1.5 billion in federal debt guarantees to stave off bankruptcy in 1979. Chief Executive Lee Iacocca created new models, including the front-wheel-drive K car, and was able to turn it into a profitable carmaker.

Of the bonds sold to finance that rescue, $225 million from the Auburn Hills Trust are still outstanding, according to data compiled by Bloomberg. The 12.375 percent note maturing in 2020 was issued at par in 1990 as unsecured senior debt without the federal guarantee. The bond has risen to 149 cents on the dollar, the yield shrinking to 7 percent.

GM's gains have washed over onto the debt of Ford, which also needs a deal to limit retiree health-care expenses.

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