GM Bondholders: No Good Answer

General Motors (GM) unveiled its new turnaround plan today after the company’s less aggressive viability plan was shot down by the Auto Task Force in February. Admittedly, this plan is much more realistic about what the company needs to do in order to become a viable entity. The most important feature of the plan is a debt restructuring that will offer $27 billion worth of bondholders 225 GM common shares for each $1,000 in principle exchanged. GM will need about 90% of its bondholders to accept this deal in order to avoid chapter 11 bankruptcy according to the statement. There is no question that this is a tall order, especially considering GM shares are trading right around $2 on Monday, meaning bondholders will not be made whole unless the company survives long enough for the share price to more than double.

Furthermore, by converting to a common shareholder, you must believe that the new-look GM will be able to survive. As I am sure the bondholders realize, if GM does eventually go bankrupt it is much better to be a bondholder than a shareholder. At least as a holder of GM debt, in a worst case scenario, you will have a claim on some of GM’s not-insignificant assets. This is an extremely interesting proposition, as GM is telling their bondholders its really their decision: Chapter 11 bankruptcy or try out the new viability plan.

Of course, this is just one feature of the new plan which includes substantial job cuts, dealership network reorganization, shedding the Pontiac brand, and oh yeah, another $11.6 billion loan from the government. If the plan is approved and put into action, the U.S. government would own a majority stake in the struggling automaker. GM’s negotiations with the United Auto Workers union continue to be unresolved, but developments on that front could arrive any day.

GM stock is up by more than 20% as the tougher restructuring effort has elicited some excitement. However, not everyone is convinced the plan adds up, from Douglas McIntyre at 247wallst.com,

“On news that GM (GM) has put together a new and very aggressive restructuring program, its shares are higher by 22% to $2.07, which gives the company a market cap of $1.28 billion. With the large amounts of equity that GM is offering in exchange for $27 billion in debt from creditors, for part of its financial obligation to the Treasury, and for money it owes the UAW pension plan, current common shareholders will end up with 1% of the company.

That would value the firm at about $130 billion after all of the transactions are done, based on the stock price of GM today.

With Toyota’s (TM) market value at $138 billion, the GM number is a bit of a stretch.”

The calculations of Mr. McIntyre are all academic at this point; it comes down to whether the bondholders believe that this plan is the way forward. We are anxious to see what the approval rate is on this plan,;at least we know that GM is realistic about what needs to happen. All of this is for nothing though if GM cannot find a way to sell more cars.

GM Bondholders: No Good Answer

Comments

[User 386342:]

Worse than 225 shares of common for $1000 in unsecured debt - the stock is immediately subject to a 100 to 1 reverse split before issue to the bondholder, so that 225 becomes only 2 shares of GM stock - probably trading for more than $2, but certainly not in the neighborhood of $150-$200 per share. See the prospectus. It's noted in a few places, but this one provides the complete example, page xvi: "1,000 U.S. dollar equivalent amount of old notes would be exchanged for 225 shares of GM common stock, which would be converted to 2 shares of GM common stock after the reverse stock split and the rounding down of fractional shares occur."

No love there.

Pax et bonum

Apr 27 07:42 PM

[lykin44:]

I don't know whose math is correct. The $2.00 per share price per common is predicated on the current amount of shares oustanding , Which seems to be 2B shares. After the restructure the common share will rise to 60B which is 1/30 of the current value. To me that means $.06/share. That to me is a rediculously low ball offer. Lets go to bankruptcy.

larry

Apr 27 07:59 PM

[Cobra 1:]

In court, do the bond holders get anything? If not take the penny's on the dollar now and hope you get something if the company becomes successful. No brainier to me. Get nothing then!

Apr 27 08:24 PM

[Fritz Hende...:]

Its simple. 611 million shares of current common stock represent 1 % of new stock. There will be 60 billion shares of new stock. Lets beside splitting.
The value of a viable "new GM" after recovery (1, 2, 3 years?) may be about 35 to 50 billion $. One share unter best conditions may value then 0,7 $.
225 Shares at 0,7 $ means for bondholder finally to get 16 cent on the dollar. After some years.

There only one solution.
All bondholders should join. The bondholder comitee has too little political weight. Show Washington that there are tenthousands of angry bondholder, and there will be elections in the future.

Anybody has to organize bondholders protests, installing a website. Lawyers of the comitee could provide knowledge the small bondholder do not have.
The goverment tries to betray the bondholders in many ways. (tricky: 225 shares seems to be much in the first sight).

GM says in court there may be nothing left for bondholders. And a lot of newspapers are repeating it without using brain, supporting unwillingly the GM/task force side. Its uncorrect, GM and the government could lose too, they could lose very much, they are risking very much.
"Quick rinse" and quick bankruptsy don't exist in the case of GM.

Once again, the bondholder have to join quickly. To speak with one voice. To get a fair deal.

Apr 27 08:50 PM

[Fritz Hende...:]

I forgot to make a thing clear. The offer of 225 shares means, if not failing, the stock exchange value of those "new" shares will be around 2 to 4 cent on the dollar in the next months, a 2 - 4 % recovery for bondholder.

I read in a newpaper of a recovery of 46 % (on the $) for bondholders, this is nonsens based on today share price of 2,04 $.

GM is saying, look bondholder, in court it could be worse, study well this offer (of 2 cents on the $). I couldn't help, but GM should be named for making the ugliest joke of the year.

Apr 27 09:47 PM

[mcl_mixer:]

The bondholders negotiating team has good reasons for turning this offer down. The Obama team wants this in the courts. That way they don't get blamed if the UAW gets hosed. Anything can happen in bankruptcy court. Sure, the bondholders may get less, but so may the UAW. They could lose their retiree healthcare. Pensions could be turned over to the PBGC, or frozen. Wages and benefits could be slashed. In bankruptcy, it'll all depend on what a judge thinks is fair to all parties. I own a bunch of these GM "retail" bonds. I'll take my chance in court.

On Apr 27 08:24 PM Cobra 1 wrote:

> In court, do the bond holders get anything? If not take the penny's
> on the dollar now and hope you get something if the company becomes
> successful. No brainier to me. Get nothing then!

Apr 27 10:32 PM

[hatarakiman:]

The unsecured bond holders don't need to accept this offer if they think 46% is a good recovery rate. They can just short GM stocks at the current price or go naked call if they are still available.
The weird thing is that GM goes up today even with this news.

Apr 27 10:58 PM

[Livin' in t...:]

Seems to me this is a $.40 on the dollar deal in stock, "who cares". The 225 shares is before the reverse split and to build on "user386" it gets rounded down immediately to 2 post split shares and no cash for partials. Brokers who process exchanging get 5% on the $1,000 face, as a fee. The Fees looks like "50 pieces of silver" and no broker will recommend taking this deal, just based on the client risk. The big boys want this in the courts to activate their "CDSs" and get full face value on their investments from the banks. This might also be the right place for the retail bond holder to make a case to a judge for being left alone. The big loser is the US taxpayer who has to support the TARP money used to pay the Institutions for their worthless bonds. This could look like the great American ripoff. "Credit Default Swaps" should be illegal and could be the demise of the whole system if not reformed. If GM goes to the courts wait til we see banks 3rd qtr earnings. "NOT". And so right back down we go! What choice do we have? HELLO JUDGE?

Apr 27 10:59 PM

[altaman:]

Resist the fascist/socialist takeover of our economy by the Obama administration - Boycott GM, BAC, WFC, GS, etc. We should make them fail ASAP, and let the chips fall, rather than giving up our freedom.

Apr 28 02:19 AM

[NeutronBob:]

I dumped most of my bonds a while back. I'm holding onto the rest, and will ignore the exchange offer. My small remaining bond holdings are in my f*** the UAW (and Obama) fund. I'll see them burn before I'll help subsidize the administration plan to pay off the UAW at the expense of the bondholders.

Apr 28 03:15 AM

[Mad Hedge F...:]

Lend money to a bad company and you get hurt. General Motors (GM) CEO Fritz Henderson made known his final, final, last ditch offer to avoid bankruptcy. Owners of $27 billion of bonds will get 10% of the company. The unions will get 39% of the company. Pontiac will be axed. Six more plants will be closed, laying off 21,000 workers. What will happen to 3,900 dealers is still up in the air. With the stock now at $2, Fritz has very little to bargain with. Whatever car business survives this won’t look anything like the GM we know. Why do I think we are headed towards a Ford (F) only nation?

Apr 28 10:17 AM