GM Bondholders Double Negative on Debt for Equity Swap

Back when TTAC spied with our little editorial eye GM’s slide into bankruptcy, we never imagined that it would be such a convoluted process. On one hand, GM’s slow-mo train wreck has provided plenty of grist for our mill. On the other, there’s only so much Firesign Theater a carmudgeon can take before he or she wants to play the Eagles “How Long” at top volume and be done with it. Still, ours is to question why. So why are reporters covering the GM bondholders debt for equity swap—or lack thereof—resorting to double negatives? “General Motors Corp. bondholders are working with the automaker to craft a debt exchange that discourages investors from not participating, according to a person with direct knowledge of the discussions.” I’m gonna take a flyer here: is that the same as forcing them to participate? So what stick has Bloomberg unearthed/used to suggest common sense?

The talks include giving investors who exchange their debt greater security and more seniority over unsecured bondholders who don’t in an effort to ensure maximum participation and avoid bankruptcy.

Translation: the GM bondholder committee doesn’t want any “free riders”: bondholders who hold out from the swap, who later kick ass. There is history here . . .

In December, Newport Beach, California-based Pimco pulled out of an investor group participating in GMAC’s debt swap. While holders led by Dodge & Cox accepted as little as 60 cents on the dollar to reduce GMAC’s debt, the bonds Pimco kept soared as much as 83 percent, to 80.5 cents on the dollar, after GMAC won approval to become a federally backed bank.

[Quick digression: there should be a criminal investigation into that deal. PIMCO pulled out of the GMAC swap just hours before the Fed granted GMAC a waiver so it could become a bank. Just before the U.S. Treasury dumped $6 billion of your hard-earned tax dollars into the sub-prime purveyors to keep them afloat. If that doesn’t not pass the smell test, nothing does. Or doesn’t.]

The GM bondholders are scared shitless of Pimco, who resigned from the steering committee of GM bondholders in January, claiming “we don’t work well with others.” On the other hand, why should they play ball and prop-up GM?

“There is little incentive not to be a ‘free rider’ holdout on the exchange, as GM is unlikely to be able to offer a coercive deal that makes tendering bondholders better off than non-tendering bondholders in event of a later bankruptcy,” Brian Johnson, an analyst at Barclays Capital in New York, wrote in a report dated Feb. 13.

So much for that then. But instead of leaving it at that Bloomies wants to offer its readers a piercing glimpse into the obvious, dressed-up as inside information.

One of the obstacles to coming up with an attractive offer for bondholders is that GM has already pledged most of its assets to existing debt, according to the person.

Ya think?