Playing the Auto Bailout With Yields as High as 45%

Investors are looking for ways to play the automobile company bailouts, without having to speculate on the General Motors (GM) or Ford (F) stocks. A safer way of speculating on the autos is by buying their convertible preferreds, notes, convertible debentures, and minibonds, all of which should be paid off before the common shareholders are paid off, in the event of bankruptcy.

• General Motors, 4.5 convertible debentures, 2032, (GXM) 25%
• General Motors, 5.25, 2032, convertible debentures B (GBM) 34%
• General Motors, 6.25, 2033, convertible debentures C (GPM) 36%
• General Motors 7.5, 2044, (GMS), 43%
• General Motors 7.375 (HGM) 44%
• General Motors Senior Notes (BGM) 48%
• General Motors 7.25 Notes (RGM) 48%
• General Motors 7.25 (XGM) 45%
• General Motors 7.25 QUIB (GMW) 45%
• GMAC, 7.25 notes, 2033, (GKM) 42%
• Ford Motor Capital Trust II 6.50% Cumulative Convertible Trust Preferred Securities due January 15, 2032 (F-PS) 35%
• CorTS Trust II Ford Notes 8.00% Corporate Backed Trust Security Certificates (KVU) 36%
• Certificate of Trust Ford Debentures Corporate Backed Trust Securities 7.40% (KSK) 34%
• Ford Motor Company 7.5% Notes (F-PA) 30%
• Lehman 8% Corporate Backed Trust Certificate Ford Motor Company Note-Backed Series 2003-6, Class A-1 (XVF) 33%
• Ford Motor Credit Co. LLC 7.6% notes due March 1, 2032 (FCJ) 23%
• Ford Credit Notes is the Ford Motor Credit 7.375% Notes due October 15, 2031 (FCZ) 22%

Above symbols are based on Yahoo's format for stock ticker symbols. Research the details on these securities before investing.

If you like high yields, you should check out the list of monthly dividend stocks at WallStreetNewsNetwork.com.

Disclosure: Author does not own any of the above.

Comments

[cobiacomm:]

Ford and GM are in a negative equity situation . Buying debt instead of stocks may be a "safer way of speculating on the autos ", but the author is presenting a biased view pandering to greed and ignores presenting the risk exposure. The standard disclaimer, "Research the details on these securities before investing" included in the posting doesn't provide any guidance on balance sheet direction, debt structure, and scenarios where investment value could quickly drop to zero.

2008 Dec 10 08:56 AM

[whisperonth...:]

Those of us who dare to step into the high risk stocks for the yield are already aware that it's a win or lose game. We know that we could easily lose what we dare to put in, and we know that we could also come out ahead. We don't bet the farm on it, nor do we sell children, or trade in our jewelry. But maybe we do put a little bit in on this with the dream that the end result could be something nice to leave for our kids, or just what got us through retirement. Yes, it could mean we don't get to eat out for several months, we don't get to buy a new car. But those things are easy to deal with when the possibilities for tomorrow are endless.

2008 Dec 10 09:27 AM

[Dan Weiss:]

A couple of things to keep in mind. The mini-bonds are unsecured bonds that trade on exchanges therefore they are naturally less risky than the equity but at the same do still have risk. THat being said most are trading at about 16 cents on the dollar (they have a par value per share of $25). GM has said on multiple occassions that they plan to try to restructure this debt which would most likely result in a double or more from current levels if it is completed.

2008 Dec 10 09:37 AM

[JRJ:]

So what is the downside risk (worst case scenario) - as with Freddie and Fannie debtholders get nothing ??


On Dec 10 09:37 AM Dan Weiss wrote:

> A couple of things to keep in mind. The mini-bonds are unsecured
> bonds that trade on exchanges therefore they are naturally less risky
> than the equity but at the same do still have risk. THat being said
> most are trading at about 16 cents on the dollar (they have a par
> value per share of $25). GM has said on multiple occassions that
> they plan to try to restructure this debt which would most likely
> result in a double or more from current levels if it is completed.

2008 Dec 10 10:06 AM

[Dividend Gr...:]

The securities do yield a lot.. But buying them just because they yield so much is not a reason to enter a position. I view them more as a long-term investment. In the worst possible situation you will get equity in the "new" GM and "new" Ford, and this equity will have much more appreciation potential than the current one.

2008 Dec 10 10:46 AM

[Dan Weiss:]

GM has very little secured debt so its likely the bondholders would get something back regardless but its possible in a worst case scenario they get money back at slightly lower than current levels and have to wait a significant period of time to receive it while courts negotiate it.

2008 Dec 10 10:46 AM

[Bill M:]

Playing with these stocks now is like russian rollette with one in the barrel. Extremely risky for long term and not worth the hassle.

2008 Dec 10 11:05 AM

[Bill M:]

Extremely risky for long term or even short term. Its like playing russian rollette.

2008 Dec 10 11:07 AM

[joeevan:]

The rescue plan notes: "As long as the loans are outstanding, the auto companies would be barred from paying dividends to their shareholders or bonuses to their top executives."

Does this stipulation apply to the convertibles and related certificates or just dividends for common shares?

Thank you.


On Dec 10 10:46 AM Dividend Growth Investor wrote:

> The securities do yield a lot.. But buying them just because they
> yield so much is not a reason to enter a position. I view them more
> as a long-term investment. In the worst possible situation you will
> get equity in the "new" GM and "new" Ford, and this equity will have
> much more appreciation potential than the current one.

2008 Dec 10 05:37 PM

[whisperonth...:]

The link to the monthly dividend stocks at the end of the article is basically worthless since it hasn't been updated since August 2007. Several of the ones on the list no longer exist, and another bunch no longer have dividends. Some are now literally penny stocks (under $1). It would be nice to have an updated list to peruse.

2008 Dec 10 06:52 PM

[zalo:]

Buy bonds, prefereds, etc in the face of a bankrupcy situation? This is a value trap, yields doesn´t matter at this point, only how much from the face value you will get back.

2008 Dec 10 08:37 PM

[Todd L:]

Isn't anybody going to comment that Jim Cramer spent much of his December 9th show explaining exactly what the poster wrote on December 10th? Anybody?

2008 Dec 10 10:50 PM

[sr9web:]

I've been watching GM's GPM issue since $2.50 - and even a that I passed.
If you want low price, high yield look at NRO or CYRV.

2008 Dec 10 11:01 PM

[Jimmy Lathrop:]

If you would like to see where all of these issues are going, just compare them with the preferreds on Fannie and Freddie. Does that sounds like a safe investment to you? I think scratch off lotto may be sounder paper.

2008 Dec 10 11:45 PM

[Timmothy Posey:]

This is TOO risky. It is almost like some binary gambling option, where the speculator wins or loses it all. If you want something without the binary option, take a look at high yield corporate debt. An etf like JNK or HYG offers plenty of yield and capital appreciation opportunity without the do-or-die mentality that this author writes about here.

2008 Dec 11 03:54 PM

[casey00001:]

No, these payments do not qualify as dividends. They are interest payments to the shareholder. As such they are not subject to the 15% capital gains rule. According to the perspectus, the dividend can not be suspended. (GMS)


On Dec 10 05:37 PM joeevan wrote:

> The rescue plan notes: "As long as the loans are outstanding, the
> auto companies would be barred from paying dividends to their shareholders
> or bonuses to their top executives."
>
> Does this stipulation apply to the convertibles and related certificates
> or just dividends for common shares?
>
> Thank you.

2008 Dec 11 07:03 PM

[Rokjok777:]

pigs get fed, hogs get slaughtered

2008 Dec 11 07:10 PM

[User 265729:]

Rokjok777:

When they get into the holes when this sucker goes down they'll cover the entrances with plenty of Redi-Mix. People know where the holes are too.

We have Congress pretending that they may not vote for the bailout, like they care how much anything costs or who's paying for it.

Did you know they added a rider on the bill to give federal judges a pay raise? No kidding! This is really interesting. I guess they want to make sure they are taken care of when this sucker goes down. Or, they need to bailout the federal judges too!

Well, will soon see if there is life on the other side of a black hole very shortly.

2008 Dec 11 08:22 PM

[ezrasfund:]

Bailout Solution???

Please explain to me why this is a stupid idea!

Auto Workers Pension funds must have enough $$ to buy a significant portion, if not all, of the debt of F and GM at pennies on the dollar.

Covert those bonds into preferred shares, equity, what else (experts?) and relieve a good part of the financial pressure on these firms.

In short, surely the auto workers, with the value of their pension funds, must have enough equity to bailout their employers. Maybe they could own the companies!

All their eggs in one basket!? That's the life of a real entrepreneur.

2008 Dec 11 11:03 PM

[Kinnick:]

Looks like the bailout may be dead for the short term. This is a foolish spec play right now. Stay away, it's all radioactive.

2008 Dec 11 11:37 PM

[Dan Weiss:]

Bush threatened congressional republicans that he would use TARP money for the bailout if this did not pass Congress. I would expect an announcement over the weekend that a limited amount of TARP money will be used.

2008 Dec 11 11:46 PM

[Chris B:]

It's startling to see some investors who appear to think that bondholders wouldn't lose everything in the event of a GM / F bankruptcy. Yes, bondholders get paid before preferreds, who get paid before common stockholders, but there are a lot of creditors in line before bondholders. In the case of these automakers, the debts compared to assets are so massive, and the equity so little, that by the time Ford or GM paid the costs of liquidation, pension, final salaries, lawsuits, legal expenses, accounts payable, etc. I seriously doubt that there would be a dime left for any bondholder. Most of their real estate is already mortgaged for more than it is worth, and total inventory + cash wouldn't even cover the legal costs of bankruptcy (most of it is used as collateral anyway). If you spend $100 on these bonds, you can expect one of two possible returns: no bankruptcy or bankruptcy, $130 or $0.

In terms of probability theory, investors are placing a probability of .7692 on "winning" $30 and a probability of .2308 on the probability of "losing" $100. Do you think there is a 77-100% chance that these insolvent automakers will suddenly get enough money to pay their other obligations AND their bonds? Roulette seems tame in comparison.

I personally think there are much less risky ways to swing for the fences. Many equities could easily bounce 30+% in the kind of recovery that would be required for these bonds to pay off.

2008 Dec 12 12:36 PM

[uncle bubba:]

Debt restructure aims for 33 cents on the dollar, or in the case of XGM. $25.00 face, would reduce price to $8.25 per bond which currently trades for $3.29 per bond, thats 250% return to those who gambled at 3.29. plus the balance of the original share cost in new equity shares, which wipes out the current equity holders. Plus the ex-dividend date is 12/29 and those who gambled at 3.29 will receive a dividend in January of aprrox 55% return on the original investment. Gambling, yes, high return if you win, you bet. The guy who thought it was only 30% return doesn't understand this bond and where it will go if they survive.

2008 Dec 26 06:55 PM

[User 330149:]

Has the 1/1 interest on HGM been given yet?

Mike


On Dec 10 05:37 PM joeevan wrote:

> The rescue plan notes: "As long as the loans are outstanding, the
> auto companies would be barred from paying dividends to their shareholders
> or bonuses to their top executives."
>
> Does this stipulation apply to the convertibles and related certificates
> or just dividends for common shares?
>
> Thank you.

Jan 02 07:07 PM

[User 330149:]

Has the 1/1 interest on HGM been given yet?

Mike


On Dec 10 05:37 PM joeevan wrote:

> The rescue plan notes: "As long as the loans are outstanding, the
> auto companies would be barred from paying dividends to their shareholders
> or bonuses to their top executives."
>
> Does this stipulation apply to the convertibles and related certificates
> or just dividends for common shares?
>
> Thank you.

Jan 02 07:07 PM