A few weeks ago we posted an article on an immediate catalyst for the shares of General Motors (GM). One of the comments prompted this follow up article. More specifically, a comment was posted wondering what kind of catalyst will the retirement of the Series A Preferred stock have on the share price. This is an interesting question and requires a bit of explanation as it is not as cut and dry as the Series A conversion.
As laid out in our earlier article, the Series B Preferred shares have a mandatory conversion on December 1st, 2013. The effect on the value of the company when this occurs is much easier to understand because we know that it is mandatory and we know the worst case conversion ratio. We will defer to our earlier article for a more in-depth analysis. The Series A is not as cut and dry.
There are 276,101,695 shares of Series A Preferred shares with a liquidation price of $25 per share that are held by institutional investors (i.e. governments and unions). They may be redeemed on or after December 31st, 2014. Putting aside the fact that this event is over a year and a half away, we can't say with certainty when the company will redeem these but considering that the dividend on this security is pegged at 9%, we can imagine it will be promptly redeemed.
When this security is redeemed, the company will have to pay $6.9 billion to settle and we could imagine the preferred being paid with a mix of cash on hand and proceeds from a bond offering. For argument's sake, let's assume that the company replaces the preferred stock with a bond paying 5%. We feel this assumption is conservative since this would have the most negative impact to net earnings while keeping liquidity intact.
Currently $621 million in dividend payments are being doled out annually for the Series A Preferred Stock. If the company floats a bond at 5% and uses the principal to pay off the preferred stock their new interest payments would be in the range of $345 million annually. This difference adds around $276 annually, pre-tax, to the bottom line. Not life altering considering the size of the company, but still not an insignificant amount when compared to 2012's net income attributable to common stockholders of $4,859.
Again, this catalyst is not as exciting as the conversion of Series B, but nonetheless, it is worthwhile to mention as this catalyst is purely financial engineering and requires no more cars to be sold than the current run rate.
Disclosure: I am long GM.