Editorial: General Motors Death Watch 220: My Kingdom For Your Debt

Rick Wagoner lost control of General Motors this week. Forget about his title; game over for the embattled former Duke basketball wannabe. There’s a new sheriff at GM – and it’s a bunch of Wall Street guys that few on Main Street can name. It’s the hedge funds that have been acquiring GM’s bonds. So here’s how these guys will play The General to make a killing on the pending government bailout:

First, they’ve been reading TTAC. The money men know GM can’t possibly turn the business around without a major restructuring. That means fewer brands, dealers, a busted UAW and a balance sheet that looks healthy, rather than one destined for the emergency room. They know that one of two things has to happen. Option one: bankruptcy. It’s the most obvious choice, but one to be avoided at all costs (as per GM management).

Option two: a non-C11 cram-down on all the creditors, the unions and anyone else to whom the GM monster owes money. Either way, every one of these creditors will end-up with a bunch of paper (new equity or new debt), but no cash for the credit already extended.

The bond market sees this coming. GM’s non-bank debt– mostly unsecured obligations– trades between 10 and 20 cents on the dollar. Translation: anyone holding GM paper has very little prospect of getting paid in full when the debts come due. Right now, GM’s attempting the cram-down on those bondholders (and the United Auto Workers). GM CEO Rick Wagoner hopes to trade debt for equity– or perhaps arrange a debt exchange– with GM’s bondholders. That’ll show Congress that he’s “making progress.”

But Red Ink Rick seems to have forgotten that Wall Street “hedgies” control GM’s debt. And they want to make money soon rather than never later. And the plain truth is that the hedge fund playas are going to win this game with or without a GM bankruptcy. Either GM gives them the terms they want, now, or GM will have to file. The hedge fund boys don’t care which way GM goes. In either scenario, they’ll end up controlling the company.

Their terms are simple: give the hedge funds enough new shares now so they can control the General’s Board of Directors. All indications are that GM’s bending to their demands. At the same time, the bondholders are demanding that Wagoner show them the rest of the plan he’s going to present to Congress that proves GM can avoid C11. That means better terms from the UAW labor agreements and the VEBA health care program, killing some brands and dealers, and making even more cost cuts.

And if GM files? No big deal. The government won’t let GM be liquidated. Nor will it nationalize the automaker. The reorganization will happen fast. Again, the bondholders will get to call the shots– right behind the $5b or so of secured bank debt. It’s a pittance in the scope of GM’s total liabilities; the automaker’s bond debt totals nearly $36b or so.

Assuming the hedge funds have been acquiring GM’s bond debt for pennies on the dollar, their total outlay might be around $4 to $8b. That’s not a lot of money, considering that the Feds are likely to put in another $12b or so of your hard-earned taxes. And that’s AFTER the group haircut.

The hedge funds will end-up calling the shots at a company that does $150b in sales with a global franchise and a new balance sheet financed by the taxpayers. Better yet, it’s a company that must be structured in a way to make money. The government wants to get paid back; the Feds will be sure that everyone gives enough so the company can be profitable. And that works for the hedge funds too– they got in on the cheap for a company guaranteed not to fail. (Ish.)

But don’t expect the hedge fund guys to show-up at the Capitol this week. In fact, they’ll stay well out of the limelight while Congress worries about Rick’s mode of transport to D.C. All the hedge funds want is a plan that works, and money from Congress. And then they can steer the wheels at a new GM, one that’s got a new balance sheet, a new management and a slimmed down North American business that makes money. It’s a good bet to take.

How much would a newly profitable GM be worth?