By on April 28, 2009

Automotive News [sub] reports that GM’s bondholders have turned down the firm’s debt for equity offer of 225 shares of “new” GM stock per $1K of debt. The deal, which would have given bondholders a ten percent stake in a partnership with the UAW (39 percent) and the Government (50 percent) and existing shareholders (1 percent) was derided as “neither reasonable nor adequate” and “a blatant disregard of fairness” in a prepared statement. “The offer was made unilaterally, without any prior discussion or negotiation with bondholders and in spite of repeated calls for dialogue,” write advisers to GM’s ad hoc bondholder committee. “We are deeply concerned that GM waited until late April to make its offer.” Money quote? “This offer demonstrates that the company and the auto task force, unfortunately, are pinning their hopes on an extremely risky and legally questionable turnaround in bankruptcy court.” And how.

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18 Comments on “Bailout Watch 512: GM Bondholders Reject Debt for Equity Swap...”


  • avatar
    Droid800

    Thank God.

    Even bankruptcy is better than that bullshit deal that the PTFOA came up with for GM. The last thing GM needs at this point is the UAW and the government having control of the company.

  • avatar
    NBK-Boston

    One little-reported element of the GM proposal (225 shares of GM stock per $1000 of bonds exchanged) is that there is a 100 to 1 reverse stock split set to take place immediately after all this, with fractional shares rounded away from bondholders, but purchased for cash from existing stockholders. As they state explicitly in the fine print somewhere, someone with just $1000 in GM bonds would get 225 shares of stock, but then that would be immediately converted to 2.25 shares of new stock, which would then see 0.25 shares shaved off, leaving the holder with exactly 2 shares. Even fractions above 0.50 would be rounded down to nothing. On the other hand, a shareholder currently holding 225 shares of GM would get 2 new shares, and see his 0.25 fractional share lumped together with everyone else’s fractional shares for eventual sale on the market, with the cash proceeds eventually distributed back to the original holder.

    A large bondholder with millions of dollars of face-value to trade in would probably not care that much about losing, at most, about one new GM share. But to the extent there are small-holders out there with small numbers of GM bonds in their 401(k)s or whatever, this is simply an extra bit of haircut which would affect that class in dis-proportion to the size of their holdings — more small holders means more odd-lots of fractional shares to shave off, relative to a small number of big holders owning the same total face-value.

  • avatar

    I’m bracing myself for the scapegoating by talking heads and heads of state. Bondholders are the reason why GM failed, right? Riiiight.

  • avatar
    toxicroach

    I wonder how much of this is just dumbshow and how much real.

    If I were the CEO of an investment firm being asked to accept that deal, I simply couldn’t say yes, not if I didn’t want to get sued into oblivion by every investor I had. My fiduciary duty to the clients would simply make accepting that an impossibility.

    So I wonder who thought this was viable… or was it never expected to work, and the whole thing is just political showmanship (look, we tried, we really tried, but those damn bankers…)

  • avatar
    Landcrusher

    Another awesome photo choice!

    Sajeev,
    My thoughts exactly, neighbor.

  • avatar
    Robert Schwartz

    The Wall Street Journal had an excellent chart on this deal. Unfortunately, I can’t copy it into this block. Here is the link, Warning $$$.

    Here is the basic information:

    Pre Deal:
    Stockholders 100%
    Secured Debt 15.8G$
    Bondholders 27G$
    UAW 20.4G$
    USA 27G$

    Notes: G$ is a Giga Dollar or a Billion Dollars. Includes commitment of USA to lend 11.6G$ not yet funded.

    Now, assume that the deal goes down the way PTOFA wants it to.

    Post Deal
    Stockholders 1%
    Secured Debt No Change
    Bondholders 10%
    UAW 39% + 10.4G$
    USA 50% + 19.6G$

    There are a couple of ways to look at this. Here is one:

    How much did the new stock cost each group, per share?

    Taking each 1% as one share.

    Stockholders 1.2G$*
    Bondholders 2.7G$
    UAW 0.27G$
    USA 0.15G$

    *based on current market value

    Here is another one:

    How much does each group value the whole company at based on its own deal, but not including 45.6G$ of debt that will still be there post deal.

    Stockholders 120G$
    Bondholders 270G$
    UAW 26.2G$
    USA 14.8G$

    I could go on, but I think the drift is obvious. The bondholders are getting screwed, and royally.

    News at 11. Lawsuits sure to follow.

  • avatar
    Zammy

    I can’t believe anybody thought the bondholders would voluntarily take such a screwing.

    GM owes the UAW $20B. GM owes the bondholders $27B. Both claims are unsecured.

    The proposal would give the UAW 50% recovery in cash, plus 39% of the new GM. But it would give the bondholders zero cash and 10% of the new GM.

    That’s equitable – NOT.

    A fair breakdown would be closer to:

    Existing equity holders get nothing.
    Secured bondholders get par.
    Unsecured bondholders get 36% of stock, plus 40% recovery.
    UAW gets 27% of stock, plus 40% recovery.
    Government gets 36% of stock, plus 40% recovery.

    Or just let the whole thing fall about and head to chapter 11.

  • avatar
    HarveyBirdman

    Wow, I was just going to comment in general about how right the bondholders’ ad hoc committee is, and yet I read the comments and the B&B have gone the extra mile (and then some) breaking down the elements of this offer (special props to NBK-Boston, Mr. Schwartz, and Zammy). It’s what makes this site great.

    Back on the original generic point I was going to make, it’s good to see at least ONE group standing up and questioning the legality and propriety of all of this backroom dealing and Federal manipulation that’s going on here. It looks to me like the bondholders are itchin’ to get to Ch 11 and to put all of this in front of a judge. Americans really need to wake up and realize the serious long-term damage being inflicted by our government by violating the sanctity of contracts and imposing rule changes on a whim.

  • avatar
    Pch101

    It looks to me like the bondholders are itchin’ to get to Ch 11 and to put all of this in front of a judge.

    No, they’re not. Everyone is simply arguing their most extreme cases, so that when they end up “meeting in the middle” that the middle has been moved as close to them as possible.

    The government is offering equity because equity means zero cash. The best outcome for the government is to pay zero cash.

    The bondholders don’t like that. They want more than zero cash. They will cry foul.

    The government will now probably have to offer some combination of equity and cash…which is really just a way of offering some cash. The likely outcome is that the bondholders will demand more cash, before a deal is cut.

    The equity is effectively irrelevant here. What really counts is how much cash gets paid now. The equity is just window dressing, to make lower amounts of cash appear to be more appealing, when everybody at the table knows that cash is the only king that counts here. For the bondholders, equity is a compromise, not a goal; for the government, it’s money in the bank.

  • avatar
    johnny ro

    For the government, equity means less money printed or borrowed from our next masters, Red China. Not money in bank. The gov IS the bank.

    Whats equitable is to take GM off life support and sell off the worthless parts (wanna but some superfund sites anybody? or some nice brand names?) and pay off secured creditors with proceeds. Let UAW die, and their people can latch onto public tit for rest of life via PBGC which you and I will pay for (see above for printing money and Beijing), not having any defined benefit pension of our own.

  • avatar
    kowsnofskia

    “A fair breakdown would be closer to:

    Existing equity holders get nothing.
    Secured bondholders get par.
    Unsecured bondholders get 36% of stock, plus 40% recovery.
    UAW gets 27% of stock, plus 40% recovery.
    Government gets 36% of stock, plus 40% recovery.

    Or just let the whole thing fall about and head to chapter 11.”

    To me, a fair breakdown would be as such:

    Existing equity holders get nothing.
    UAW gets nothing. (Why is this group even at the trough? What makes them think they deserve any part of the future GM?)
    Secured bondholders get 45% of stock plus 40% recovery.
    Unsecured bondholders get 45% of stock plus 40% recovery.
    Government gets 10% stock, 40% recovery.

  • avatar
    Pch101

    UAW gets nothing. (Why is this group even at the trough? What makes them think they deserve any part of the future GM?)

    You say this as if equity is a gift.

    The bondholders want cash, not equity. If they had wanted equity, they would have bought the stock.

    The equity is just a consolation prize for the money that they couldn’t get. What this shows you is that the UAW argued from a position of weakness, and weren’t able to pull any cash out of this. A case of Rice-a-Roni would have had more tangible value.

  • avatar
    menno

    What’s to keep the bondholders from forcing Chapter 11 onto GM, anyway? Wouldn’t this work to their advantage rather than being crammed down by Barry & Co?

    One miserable South Bend parts supplier forced Studebaker into Chapter 11 in 1933.

    HarveyBirdman said “Americans really need to wake up and realize the serious long-term damage being inflicted by our government by violating the sanctity of contracts and imposing rule changes on a whim.”

    +1 on that, partner. When contracts can be rewritten at whim by the powerful and cannot by “everyone else” then soon enough, nobody will be wanting to enter into ANY contracts of ANY sort and of course, “trust” and “confidence” will evaporate like a snowman on a hot August day.

    Net result will be that the economy ceases to function at all.

    Put plainly; why the hell should I pay MY mortgage when “everyone else” can go crying to the judge and claim some BS or the other, and hope to get their mortgage interest and principal reduced? Likewise, why would I invest one frickin’ red cent into America in bonds or stocks, if the gummint can turn around and nullify the rules at any point?

    Fuhdedamnboudit!

  • avatar
    CarShark

    How exactly is this supposed to close the “confidence gap” I’ve heard so much about?

  • avatar
    GS650G

    I just love how the unions get 39%. A good argument can be made they contributed to this mess over the years, yet they are rewarded handsomely for their support.

    P,J,O’rourke was correct when he referred to the Federal government as a parliament of whores.

  • avatar
    Rix

    My Ford subordinated bonds went through the roof this week. I cashed out yesterday for a 116% gain. I bought it a few months ago after studying TTAC carefully.

    Reading TTAC has paid off for me, big time.

  • avatar
    Alcibiades

    I have a bet with my law partner that Obama will screw the bondholders, dealers, suppliers, equity, etc., and go easy on the union. he thought Obama would get tough with the union. We’ll see who is right. I think I will win the bet. If I do, the result will be terrible, for GM and the rest of us.

  • avatar
    Econideas

    We can learn from Chrysler … the government is being accused of coercing Chrysler debtors to accept the bad deal offered them – sound familiar? Obama is sucking up to the UAW and leaving the bondholders out to dry. The good news is that with all the legal red tape beginning to roll there is no way Chrysler will survive bankruptcy.
    This will start a ripple effect through the economy and a warning that with GM racing to bankruptcy that we will have a new epic crisis on our hands. Thus, the government will WAKE UP and smell the coffee and discover it cannot allow GM to go into bankruptcy under any circumstances and we will see a new offer come the end of May to bondholders. Sit tight and just say NO.

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