By on April 10, 2009

The Presidential Task Force on Automobiles (PTFOA) wants GM to get its NSFW together by June 1. To that end, the PTFOA is pressuring GM’s bondholders to take The Mother of All Buzz Cuts. As The Wall Street Journal reports, that means no cash or federal guarantees. “The Treasury Department is pushing GM to offer its bondholders, who are owed $29 billion, a small portion of shares in the company. That’s a sharp cut from a bond-exchange offer GM made two weeks ago, which included about $8.5 billion in cash and new debt in the company as well as 90% of GM’s stock, said people familiar with the terms. The Treasury, which has pumped $13.4 billion into GM to keep it afloat [plus $4.4 billion to come in June], believed the earlier plan was too generous to bondholders, said people familiar with the matter.” Well then, the PTFOA can put GM in C11 and be done with it, right? I mean, what pressure can they possibly bring to bear on GM’s bondholders now that water-boarding is illegal? Actually, this is a post-C11 wrangle.

These bondholders also are raising concerns that the bankruptcy revamp GM is considering may be unfair to investors and unions, said these people. The plan would split the company into a “New GM” containing its desirable assets, such as Chevrolet and Cadillac, and an “Old GM” holding troubled brands such as Saturn and the auto giant’s union health-care liabilities . . .

The bondholders likely will struggle to figure out how to value the latest debt-exchange offer, said a person familiar with the matter, because it isn’t clear what the government will do about the $13.4 billion it has lent GM. In a bankruptcy scenario, the government could reduce its debt in the company by transferring some or all of it to the “Old GM,” said this person.

So the ultimate threat isn’t bankruptcy, but the possibility that GM goes into C11 and the Treasury dumps the bondholders’ debt into “old” GM, where it disappears forever. In a proper (i.e., judicial) bankruptcy, that couldn’t happen. With the PTFOA sure to create whatever type of C11 it chooses, the bondholders could be completely stiffed.

That’s the kind of thing that happens when the US government gets into the car biz.

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10 Comments on “Bailout Watch 490: GM Bondholders’ Fear and Loathing...”


  • avatar

    Robert -

    If the U.S. government weren’t in the car business, wouldn’t the bondholders then be NSFW’d? A freefall into C11 or C13 would likely leave them with zero, or the portion of zero which is positive after the assets were sold to all those willing buyers out there.

    These are the same bondholders who presumably had the opportunity to read TTAC over the past two years and yet did not pursue other investment opportunities, nor did they implore the BoD to dump an obviously failed management team.

    Let’s say that GM had found a private investment angel to loan them the money to remain liquid while they figured out what to do. I doubt you would have raised an eyebrow if that entity said, “Well, you can have the money, but Wagoner has to go.”

    Actually, the same thing happened at Chrysler and Cerberus installed Nardelli without any hew and cry, despite the fact that neither Cerberus nor Nardelli know any more about the car business than the U.S. Government.

    I don’t know if the the PTFOA is a good thing or a bad thing, but the bad thing for GM investors and bondholders was GM management, as you have well detailed previously.
    That the PTFOA knows little about the car business is

    Some questions:

    1.

  • avatar
    BuzzKill

    Hate to break it to folks but there is NOTHING LEFT in GM for anyone. Has over $60 billion in corporate debt (that is the debt that is outside of GMAC debt which is basically car loans) and the enterprise value of the entire corporation is far, far, far less than that.

    Even in a normal Chapter 11 outside of any government involvement the bondholders would basically get nothing. Look at where the debt trades in the market – a few cents on the dollar. Bondholders have know for years that they would get nothing from GM, this is not new news to them.

    What is going on now is you have a bunch of deep value investors, arbs, and hedge funds who placed a huge bet that they would get something more than zero. They were betting that the government would come in and bail them out!!!!! They have now lost this bet and are crying foul.

    Bondholders should get nothing as there is nothing at GM. ZERO. In a real Chapter 11 (in normal circumstances they are very close to a Chapter 7 when dealing with small companies and mom-and-pop operations) a judge would void every single contract, decide what suppliers would get paid- usually a huge haircut, and then figure out a level of debt that the company could support – in GM’s case that would be very little if any – and the rest of the debt would be converted to stock.

    But with GM you would have an airline type bankruptcy where not much really changes in corporate operations (few airlines STILL in bankruptcy yet millions of folks fly them each month. Can you even list the airlines that are still flying today in bankruptcy? Have you even noticed? Does it matter when you book your flight? Expect 2-3 carriers to return to bankruptcy protection shortly.) as the company continues to operate just with a judge listening to the creditors attorneys on how they can get there money back.

    But in any event, there is just nothing at GM. ZERO. Lots of folks working hard for a totally failed business enterprise. Failed businesses happen every day. GM should fail just like every other failed business.

    The site has done a great job listing the millions of failures that have happened at GM. (Should have failed decades ago and been allowed to.) The sooner it is placed into Chapter 11, the bondholders left with nothing as they should be and they KNOW it, the sooner we can move on.

    Do not fear bankruptcy, embrace it.

  • avatar
    CarPerson

    HELLO!

    The bond price and rating clearly alert the bond owner and potential buyer that that piece of paper is at signifiant odds of going to zero value.

    If you do not want the zero value, sell it now for what you can get for it.

    Instead of an informed investment, you played Las Vagas with your money, betting it would go up, and got snake-eyes. Please do not expect the rest of us to bail you out.

    Move on.

  • avatar
    john.fritz

    Hue.

  • avatar
    carguy

    Awesome pic!

  • avatar
    chops

    The bond holders are playing chicken with the union. Only the union doesn’t have to really play; they can sit on their heels with the understanding that Government Motors will give them a better deal than the bond holders can expect, no matter how this goes down. Main street(the union)will get more political points (in the form of benefits on the barrel head) than Wall Street (aka bond holders) will get at the bargaining table. It’s pure politics for the union now, and the only leverage left for the bond holders is…..none.

  • avatar

    CarPerson : The bond price and rating clearly alert the bond owner and potential buyer that that piece of paper is at signifiant odds of going to zero value.

    Thank you!

    Why don’t people say this more often???

  • avatar
    golf4me

    Some of the bonds have been insured by AIG…they’d probably rather GM go belly-up than take any deal GM is giving. The gubment really screwed themselves (us!) on this one. We’re gonna pay either way.

  • avatar

    This post seems to imply the us gov can just magically make its past bailout money new debt of the post-C11 Good GM and bondholder debt be backed by the bad GM so they get nothing. But bondholders will shortly become the new owners of GM after bankruptcy, and they won’t agree to any plan that leaves them with nothing.

    This is just not possible under the law, and bankruptcy judges follow the law, not what the US Tresury tells them to do.

    I think Obama wants to get reelected. If GM fails, Mitt Romney will win OH, MI, IN, and FL (lots of UAW retirees) and thus the election. If GM goes BK but the new company gets tons subsidies and low interest federal loans, the old bondholders do just as well since they will own recepient of these loans.

  • avatar
    taymere

    Hi Carperson,

    I just bought a BUNCH of GM bonds at 9 cents/$. My decision had more to do with politics and bankruptcy law than the viability of company without government support. The way I see it I didn’t roll snake eyes, I hope for a 10:1 payoff, and fully expect a minimum of 4:1 payoff. I didn’t buy their bonds until AFTER President Obama fired their CEO and changed half their board of directors. Once Obama did that GM became his problem, and he has a lot more to lose than I do if my bonds and the pari passu UAW obligations are placed before a BK judge. If GM zigged instead of zagged in court and proceeded to Chapter 7 then he would most likely be a one term President and the Democrats would lose control of Congress. The President and Congress will not take that chance. They will blink and offer bondholders an attractive offer to ensure that either Chapter 11 is all together avoided via an out of court bond exchange, or if they do go to Chapter 11 the deal is so sweet that we bondholders let the company exit court quickly. In an out of court process I will not exchange my bonds and viola, a 10:1 payoff with 84% annual dividends for life. Not being an institutional investor no one will even contact me to offer me the chance to exchange my bonds out of court. My $10,000 in bonds is not worth the stamp to them. In an in court process either I get my 4:1 payoff or it’s one term Obama because GM died in Chapter 7. Which do you think is more likely? Being pari passu with the UAW is a great position to be in, they have so much pull outside of court that the politicians don’t dare let them suffer alongside me before a judge. And being pari passu, suffer they would. I may just pop another $5000 into this Monday.


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