Traders are putting the pedal to the metal for the settlement auction of credit default swaps on General Motors Corp. A committee of dealers and investors are planning on holding the auction on June 12 to find out what issuers will have to pay out on the bankrupt automaker's bonds.
Credit default swaps act like an insurance policy for bondholders in case the company defaults on payment. Issuers of the swaps agree to pay the buyer of the swaps the difference between the face value of the bond and whatever the recovery is after default. The amount that issuers will pay out to swap holders will be determined at the auction.
The driving force behind the auction is GM's restructuring plan where bondholders exchange debt for equity in a newly formed company, according to
Bloomberg. The settlement auction is usually held roughly a month after the Chapter 11 filing. GM filed for bankruptcy on June 1.
Depository Trust & Clearing Corp. estimates that investors purchased a net $2.31 billion of default protection on GM's debt. -
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