What Does GMAC's Bond Exchange Failure Mean for Detroit?

The GMAC bond-exchange results are out, and the screws that GMAC applied on December 10 -- tender your bonds or we won't become a bank or get TARP funds -- seem to have had some effect, with the percentage of bonds tendered rising from about 22% to 59%. But GMAC was very clear that anything short of 75% would constitute failure, so the first big attempt, in this crisis, to bail in bondholders outside of formal bankruptcy proceedings has clearly not worked.

This bodes ill for the future of Detroit, if the aim of management and the government is to avoid Chapter 11 bankruptcy proceedings. The companies can bluster all they like, but it's hard to apply moral suasion to bondholders in the way that you can with banks (and the government did, during the Chrysler bailout of 1981).

I can see why GMAC took what it could get, and accepted the 59% of bonds which were tendered into the exchange. But now those bondholders look foolish, the other 41% look smart, and GMAC simply looks untrustworthy, willing to pick off creditors one by one if it can't get them to work together.

Given these results, why would any GM or Chrysler bondholders tender into any exchange, given that the government has even more invested in the car companies than it did in GMAC? When, they might reasonably ask, was the last time that a state-owned company defaulted?

I suspect that one legacy of the failed GMAC exchange offer will be that some kind of pre-packaged bankruptcy is still in the cards for GM and Chrysler.

Or maybe there's a corporate-finance way of doing essentially the same thing: A new shell company is created, owned mostly by the UAW, which buys most of the viable assets of GM and Chrysler while leaving the liabilities and failed marques behind for creditors to fight over. With a carefully-written piece of legislation, Congress could probably insulate the new company from angry bondholders saying that the transfer was illegal. The government's TARP funds would be wiped out, but I don't think anybody seriously expects those monies to be paid back anyway.

Comments

[prudentinve...:]

Good. Now a question for you or others on this forum:

Not being knowledgeable about bond covenants, I've always wondered why a company can't simply buy back its bonds on the open market, just like a stock buyback. When a company's bond is trading at $0.20 on the dollar, why don't they just buy it on the market?

Thanks.

2008 Dec 31 12:30 PM

[uncle bubba:]

I understand some people looking at the glass half empty and enjoy making a living selling short on bad news, but I prefer to see the glass half full and congradulate GMAC on becoming a bank holding company with access to the TARP funds. They will actually use the money as congress intended and put the funds back into the economy. It was the governments intent to infuse capital to loosen the credit and start the economy. Unfortunaley the banks chose to sit on the money and shore up the balance sheet without helping the economy at all. As much as Seeking Alpha wanted and has predicted the demise of GM you might as well set your sites elsewhere. The treasury has spoken and GM is here to stay. You'll have to short someone else now.

2008 Dec 31 12:36 PM

[Sentinel:]

Of course a pre-packaged bankruptcy is in the works even as we speak (err..type). Here is why. One word.....

Cerebus.

They own a good chunk of GMAC which finances cars for GM. Cars that nobody wants to buy.

They also own Chrysler. Which, once again, no one wants a car from Chrysler.

Cerebus is chock full of former Bush I and II cronies, Federal Government losers and Masters of the Universe from the discredited world of Wall Street. So of course they are baying like hounds for the Bushie Government to save their miserable hides, even if it means bankruptcy just to dump these losers.

Cerebus....the three headed dog guardian to Hell, in Greek Mythology.

I think the name fits to a T.

2008 Dec 31 12:44 PM

[themike:]

funny how everyone thinks "nobody wants to buy a car from gm/f/chrysler" yet they still sell over 1/2 of the cars in this country!
i guess 150 million people are "nobody".

and it's cerberus you moron.
if you are going to try and appear intelligent you might not confuse an aardvark with a dog.

2008 Dec 31 12:51 PM

[mcl_mixer:]

"They own a good chunk of GMAC which finances cars for GM. Cars that nobody wants to buy."

Yeah, GM is only the top selling auto manufacturer in the United States and the world.

2008 Dec 31 01:12 PM

[nym:]

But GM is selling all those cars at prices that do not produce a profit, or even meet its current obligations, much less unfunded liabilities. I think mcl_mixer and themike expect the taxpayers to make up the difference.

2008 Dec 31 01:36 PM

[ETFnerd:]

When a company is operating profitably, the debt is not usually offered at a discount. In the cases when it is profitable and debt is discounted the firm will probably buy their debt in the open market if that is their best use for their capital.

The automakers are not profitable companies. Their equity is [just about]worthless. Money to buy back debt would have to be borrowed from other debtholders or new equity holders like the govt. New lenders/owners would want to see that the proceeds are used to make the business viable, not to settle debts with previous debtholders. If they allow it, they may well be next in line to get shafted at $0.20 on the dollar or likely less in the next iteration.


On Dec 31 12:30 PM prudentinvestor wrote:

> Good. Now a question for you or others on this forum:
>
> Not being knowledgeable about bond covenants, I've always wondered
> why a company can't simply buy back its bonds on the open market,
> just like a stock buyback. When a company's bond is trading at $0.20
> on the dollar, why don't they just buy it on the market?
>
> Thanks.

2008 Dec 31 02:44 PM

[jimmy46:]

why a company can't simply buy back its bonds on the open market,
just like a stock buyback. """""""""""

GM is doing that right now, it'll be interesting in a few months to see how much they got and at what price.

2008 Dec 31 03:52 PM

[Teutonic Kn...:]

Prundentinvestor,
Here is my layman's answer:

(1) The company lacks the cash reserve;
(2) The lending institutions won't lend them the money because of the risks;
(3) They can't raise capital in the open market as their stock price is way down.


On Dec 31 12:30 PM prudentinvestor wrote:

> Good. Now a question for you or others on this forum:
>
> Not being knowledgeable about bond covenants, I've always wondered
> why a company can't simply buy back its bonds on the open market,
> just like a stock buyback. When a company's bond is trading at $0.20
> on the dollar, why don't they just buy it on the market?
>
> Thanks.

Jan 02 12:13 AM

[Kinabalu:]

Whether you can buy bonds on the open market depends what you negotiated when you sold the bonds. I always tried to negotiate the right to buy back the bonds but some bond buyers just won't allow that. A compromise that you see quite often if a sinking fund is involved is the right to buy back enough bonds on the open market to meet the next sinking fund payment.


On Dec 31 12:30 PM prudentinvestor wrote:

> Good. Now a question for you or others on this forum:
>
> Not being knowledgeable about bond covenants, I've always wondered
> why a company can't simply buy back its bonds on the open market,
> just like a stock buyback. When a company's bond is trading at $0.20
> on the dollar, why don't they just buy it on the market?
>
> Thanks.

Jan 02 06:25 PM