Bailout Watch 490: GM Bondholders' Fear and Loathing

Robert Farago
by Robert Farago

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.

Robert Farago
Robert Farago

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  • Gregw Gregw on Apr 11, 2009

    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.

  • Taymere Taymere on Apr 12, 2009

    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.

  • 3-On-The-Tree I don’t think Toyotas going down.
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