GM Bondholders Could Emerge With 20 Percent Stake
The Freep reports on the analysis of JP Morgan’s Eric Selle and Atiba Edwards, who argue that GM bondholders could emerge from negotiations with a 20 percent stake in the world’s second-largest automaker. GM must outline a strategy to eliminate two-thirds of its $35b in unsecured debt by February 17. “We expect a bond exchange will settle around 35% of par with an equity component representing 20% of GM’s equity,” write Selle and Edwards. But the JP Morgan analysts warn that the “threat of bankruptcy will have to return in order for GM to achieve the required restructuring goals.” What, again?
Meanwhile, the UAW and CAW are beginning to feel like suckers for actually negotiating while GM bondholders like PIMCO take a walk. “Labour costs clearly did not cause this worldwide crisis in the auto industry, and labour concessions cannot possibly solve that crisis,” says CAW President Ken Lewenza in a prepared statement which reveals that the CAW master bargaining committees had authorized the union to engage in “extraordinary contract talks” with the Detroit Three. “We are encouraged by the union granting concessions,” say Selle and Edwards, “however we are doubtful bondholders will exchange without a positive incentive.”
Meanwhile, CNN Money offers more perspective on “GM’s $35b Albatross.” Key points: GM ran up about half ($14.5b) of its unsecured debt in 2003 in order to cover UAW pension obligations, and that debt is now worth about 14 cents on the dollar. And February 17 just keeps getting closer and closer.
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No-one should (will?) do anything until GM report last quarter and Jan 09 sales numbers are available. GM's report is probably going to make the Banksters and Enron look clever.
Were I a GM bondholder, I would NEVER go for this sort of thing. After all, as a senior bondholder, I would be getting 100% of the company in the even t of a default. The terms written into the bond prospectus are clear: Except in the case of DIP financing, nobody else gets paid before the senior bondholders and the banks. Next come the unsecured bondholders, and stockholders come last if there is anything left over. As a bondholder, I would rather own 100% of GM coming out of Chapter 11 than 20% of GM going into Chapter 11. Because once the bond is converted to stock, in the case of bankruptcy I go to the back of the line, not to mention that the stock isn't worth anything.
to Katie: I remember seeing, a couple of years ago, debt-load figures of around 135G and 150G USD for Ford and GM respectively. That the Ford figure has increased, while the GM figure has decreased dramatically (~100G USD), leads me to believe that the largest part of this debt is related to the financing businesses (FMCC and GMAC) ... perhaps selling 51% of GMAC allowed GM to move the debt off of its books and on to those of Cerberus.
The report states 20% of GM's equity PLUS 0.35 cents on the dollar in new, possibly government guaranteed debt. Even if the equity is worthless, with the bonds trading at 15 cents on the dollar now, that would be a double.