Open Letter to General Motors' CFO

Sir:

Though I am not as bearish as my friend Peter Eavis on the prospects for your company, I do want to give you some friendly, if unsolicited, advice: Refinance at least half of your 2005 and 2006 maturities while rates remain low.

With over $50 billion of principal coming due in the next two years, the future of GM (GM - commentary - Cramer's Take) is threatened by any increase in bond yields. With the likely weakness in the dollar, yields on Treasury obligations are unlikely to remain this low, in my opinion. Further, though spreads for GM and GMAC are not at historically tight levels, spreads in the corporate bond market are at levels not seen since 1997. Take advantage of the demand (both domestic and international) for yieldy paper while you can. For that matter, do another convert deal. It may put a ceiling over your stock price (but, hey, isn't there one there now?), but the convertible arbs will give you cheap financing while you figure out how to make your auto operations profitable (and design cars that people crave).

Though your ratings are stable from Moody's and Standard & Poor's at present, who can tell how long that will last? GM and GMAC debt are only one notch above junk at S&P, and I can tell you that you will have a hard time selling debt if you ever do get downgraded by S&P. Even if Moody's leaves you an investment-grade rating, I will tell you that there is not enough buying capacity in the bond market for crossover credits of your size. Your yields would have to rise to the point where equity investors find your bonds an interesting speculation, as was true of auto bonds in mid-2002.

Further, do you want to be subject to the vicissitudes of your cousin Ford (F - commentary - Cramer's Take)? If they catch cold, you may too, at least in the eyes of the ratings agencies. But I digress.

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David J. Merkel, CFA, FSA, is a senior investment analyst at Hovde Capital, responsible for analysis and valuation of investment opportunities for the FIP funds, particularly of companies in the insurance industry. Previously, he managed corporate bonds for Dwight Asset Management. At time of publication, neither Merkel nor his fund had any positions in the securities mentioned in this column, though positions may change at any time. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. While Merkel cannot provide investment advice or recommendations, he welcomes your feedback and invites you to send your comments to [e-mail].

Analyst Certification: All of the views expressed in the report accurately reflect the personal views of the research analyst about any and all of the subject securities or issuers. No part of the compensation of the research analyst named herein was, is, or will be, directly or indirectly, related to the specific recommendations or views expressed by the research analyst in this report.

Merkel is employed by Hovde Capital Advisors LLC (the "firm"), a registered investment advisor with its principal office located in Washington, D.C. The Firm and/or its affiliates have or may have a long or short position or holding in the securities, options on securities, or other related investments of the issuers mentioned herein.