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Bond funds face hit if GM goes for Chapter 11

Bond funds could be hit hard if General Motors files for Chapter 11, a method of gaining protection from creditors used in American law, says Artemis strategic bond fund manager James Foster.

GM and Ford were downgraded from investment-grade to high yield or junk status at the beginning of May, following months of market speculation.

With annual turnover of 105bn, GM has been emblematic of US economic strength since the firm’s incep- tion but its market capitalisation has fallen by over 70 per cent since 2000. The company has also suffered from pension and healthcare liabilities.

GM is in negotiations with trade unions over a deal to refinance their pensions that would need agreement on benefits being reduced.

Jupiter corporate bond fund manager John Ham-ilton says it is difficult to judge how exposed different bond funds have been to the GM downgrade but he thinks widening bond spreads before the downgrade mean bond markets may have already factored-in much of the problem related to the company.

Foster says: “The effect of GM depends on how the refinancing works out. If it cuts bonds to 80p in the pound, that could be less negative for the market, but if it is forced to cut them to 40p or even 30p in the pound, things could get a lot worse.

“It is a refinancing lottery and investors will be praying that when refinancing occurs it will be at a decent level. The sooner that they can get the unions to agree to their pension deal, the less negative it will be for bonds.”

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