Sunday, May 10, 2009

How Would GM Bond Holders Fare in Bankruptcy?

This from AP: Experts say GM bankruptcy almost inevitable

"For General Motors Corp., the task at hand is so difficult that experts say a Chapter 11 bankruptcy filing is all but inevitable.

"To remake itself outside of court, GM must persuade bondholders to swap $27 billion in debt for 10 percent of its risky stock. On top of that, the automaker must work out deals with its union, announce factory closures, cut or sell brands and force hundreds of dealers out of business -- all in three weeks." [emphasis mine]

So just like Chrysler, GM is basically being driven to bankruptcy. Yes yes, you could say for both auto makers that they have had all the time to do something but now they're out of money and option, it's their fault. GM's CEO Fritz Henderson, who replaced Rick Wagoner on March 29 (Mr. Wagoner resigned at the express request from the White House), pledged last week that:

""If we need to pursue bankruptcy, we will make sure that we do it in an expeditious fashion...""

However, the problem will be those "unpatriotic" bond holders again.

"The biggest obstacle to GM restructuring out of court appears to be its bondholders, who have been reluctant to sign on to the stock swap when the government and United Auto Workers union would get far more stock in exchange for debts owed by GM."

Sound familiar? Chrysler was just a prelude, a warm-up. The government successfully bullied the secure, 1st-lien senior bond holders into accepting less than 30 cents on a dollar (see my post here). And..

"GM has proposed issuing 62 billion new shares, 100 times more than the 611 million now offered publicly."

Under the restructuring plan being pushed by the government's Auto Task Force,

  • 50% stake goes to the government, in exchange for writing off half the amount of loan ($27 billion total this year). Result: 50% stake for $13.5 billion.
  • 39% stake goes to UAW, for swapping $20 billion GM's obligation for retiree health care payments and receiving $10 billion cash. Result: 39% stake for $10 billion.
  • 10% state goes to bond holders, who hold $27 billion GM debt. Result: 10% stake for $27 billion.
  • 1% stake goes to the current common share holders.

If Chrysler's case is any indication, GM's restructuring will be pushed through as the government wants. What will that portend, for the future relationship between the private investors and the government?

Here's the transcript of the interview of Thomas Lauria, who represented the Chrysler's "dissident" lenders. It aired on May 8 on PBS's Nightly Business Report.

" I think the bigger question though is will the auto industry or any other troubled industry that may have important political issues associated with it be able to attract private financing on a (INAUDIBLE) basis? Certainly a lender who looks at what is happening to the lenders in the Chrysler case might have second thoughts. And we know there are other industries that are going to need rescue financing, the airline industry, GM coming up. Will the government be the only source of that financing? Certainly the administration says that they're hopeful that the private sector will participate, but I'm not sure that this is much of an inducement for that. " [emphasis mine]

I am not sure either.


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