Bondholders Threaten GM Bankruptcy
And why wouldn’t they? As attractive as 30 cents on the dollar for equity in a firm that has five frantic days to produce a viability plan is, there seems to be some . . . hesitation. The Detroit News reports that GM is trying to finagle a $9.2b debt for equity swap with the holders of its unsecured debt to fulfill the requirements for federal loans. According to the usual anonymous sources, bondholders are holding out for 50 cents on the dollar. They say the figure mirrors the value of concessions being negotiated with the United Auto Workers. ( Sound familiar?) Luckily bondholders seem to have an ingenious solution for the UAW-bondholder deadlock: the government could just lend GM more money. This is some seriously high-stakes poker.
Technically, a failure to extract concessions would trigger a recall of the government loan, forcing GM into bankruptcy. In this scenario, unsecured debt holders would receive nothing. But bondholders argue that the UAW is only conceding 50 percent of its pension obligations, while they are being asked to erase 70 percent of their debt.
“We tend to side with bondholders in these negotiations,” says JPMorgan analyst Eric Selle in a research note. He notes that JP Morgan is “very encouraged by the pattern of UAW concessions,” but that they do not equal the sacrifice being asked of bondholders.
Lemos Stein of S&P adds that “the health care liabilities that are also potentially being reduced as part of this plan would, in a bankruptcy proceeding, be unsecured claims, so that makes them similar to the unsecured debt held by the bondholders.”
The multi-billion dollar question that remain: how will this stalemate be perceived in DC?
With a contentious stimulus bill going into conference committee, the automaker loans could well be recalled as a concession to Republicans to grease the wheels of the stimulus bill. The UAW and bondholders may not know how to compromise, but DC politicians do. And holding the firm hostage won’t rub them the right way, especially considering that a recall would leave both the feuding sides with nothing.
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Taymere, One other thing to keep in mind. As I understand it, AIG has been a big provider of "Credit Default Swaps" against GM bonds. If so, if GM went chapter 11, those bondholders would get 100 cents on the dollar from AIG! So, the government would in effect be giving those bondholders a reason to force the company into chapter 11. What a tangled web. Have you also considered the bonds maturing June 1 2009 (GRM)? Those are $0.28 on the dollar now. In just over a month they will be worth either close to zero, or $1.00. Very high stakes poker, but if your odds are correct, a way to triple your money.
Thanks for that tip on GRM gsorter, I hadn't noticed the fact that I would be redeemed in cash not shares. That's great, I'll look into it and will probably bite below $4.50 or so. Speaking of AIG, here's a tip for you, Monday is ex-dividend day for AIG-A. It yields > 100% annually right now so it's quarterly dividend alone will be > 25%. It is a mandatory convertible, but don't stop reading yet, hear me out. It's selling for ~$6 right now, it's original face value was $75 and it converts in 2011 into $49.34 worth of AIG common shares at whatever price AIG common shares are selling for in 2011. You can immediately sell those $49.34 worth of common shares for a 8x payoff in two years, not counting the fact that the > 100% dividends will have paid for your initial investment a few times over by then. AIG has 1.6 trillion dollars of CDS policies left to unwind. There have been numerous firm public pledges to the credit rating agencies by both Geithner and Bernake that AIG will pay it's debts "...as they come due..." I think either we'll get that payoff in 2011 or we'll have plenty of warning ahead of time. If not, financial armageddon has arrived, we'll all be trading cowrie shells and chickens and I'll spend my time poaching deer and growing vegetables rather than investing. I actually hate giving my AIG-A analysis away publicly because it's illiquid and I am still accumulating it. My email is taymere@gmail.com, if you send me your email address I can bounce ideas off you without alerting the masses.