GM Debt Recovery Paints a Scary Picture for Private Investors

The General Motors (GM) debt-for-equity deal reveals a genuine danger to private investors. If you are considering investing in some other turnaround, be very careful if Uncle Sam might get involved. An editorial in Thursday's Wall Street Journal presents some estimates of how much different creditors to GM will receive. I've charted these estimates (and they are not hard figures, just estimates):

From an investor's viewpoint, this is very scary.

From a public policy viewpoint, the GM results will scare off potential investors, leaving even more trouble for the federal government to try to clean up.

From a business strategy viewpoint, be cautious about your business relationships (either as customers or vendors) with entities that may soon be run by the federal government.

Comments

[Alan Young:]

Most current holders of GM bonds knew they were buying junk bonds--already at a big discount--and took the risk willingly.
By contrast:
People who spent their lives working for GM did not expect that their pensions would be put at risk to satisfy investors; they paid full price (in labor) for their retirement benefits.
Taxpayers likewise did not ask to be put at risk; it's been forced upon us.
So IMO the disparity is not as great as the graphic suggests.

May 01 03:39 AM

[Lazaris:]

The Tax Payers, the UAW and the Government have stepped up to the plate and done what is best for the industry and the country as a whole! Everybody is taking a "haircut' on this. It's time for the Bond Holders to get in the barbers chair and do the same!

May 01 04:03 AM

[bondholder:]

Looking at this chart, the only ones getting a haircut are the bondholders; they are getting scalped!

May 01 06:21 AM

[Lee 99:]

I believe there are laws that are supposed to circumvent situations like this. What happened there? Is the goverment above the law? Apparently it is.

May 01 07:18 AM

[limbaugh's ...:]

Blog by Harvard crybaby who can not get his 100 million overnight on a shortsell, cdo or some other credit deault swap scam.I am sure you are of the opionion that AIG should get 300 billion in govt. assistance also. After all we would not want to deny your 100 dollar glass of scotch and a 60 ring gauge Cohiba for you to chomp on. God forbid anybody work 30 years and get what they signed upped for. You know maybe when the 3% who are wrecking this country with all this financial derivitave crap and short selling get impacted by some human catastrophic event they will finally get it. My opionion is the next major catastrophic event in this country will be internal and probably impact a group convention of CEO's,so-called intellectual trade advocates, or office full of wall street types who scam the employees,govt.,public and stockholders. It will be Joe the plumber behind the massacre not some middle-eastern phinatic. To all you spoiled brat, got have it now Ivy Leaguer's, have fun while you tear your country down to nothing, oh, and by the way I hope you have some religion and a will because the way the anger is growing on this subject you are going to need it.

May 01 07:27 AM

[greedy bond...:]

Bond holders are not greedy and are mostly risk averse which is why they buy bonds and not the stock. Somebody borrows money from me then I should get it back...Period. I say let it burn if I do not get reasonable terms. It's the principle of the thing "don't tread on me" used to be the American spirit. Now we have become like cattle.
1. The UAW is why the company is BROKE.
2. The government has no money but mine and the other taxpayer's (taxpayers now less the 50% of Americans). SO the government will in essence be stealing my money twice. Once because I am productive and loaned my money to a company that needed it and won't repay it. Second because the take my money in taxes to pay again for the same purpose.

May 01 07:30 AM

[Gerry Sullivan:]

Back during the Vietnam War if the military had a Viet Cong that they wanted information from they would take 2 up in a chopper and question them. If the Viet Cong didn't give enough information, the military would throw one of them out of the chopper. That tended to get the attention of the survivor.

Chrysler got thrown out of the chopper yesterday. Good for Obama. He's got guts. Now we get to see what happens with
the much larger and more important General Motors. Will GM
go bankrupt?

In order for GM to avoid bankrupcy, 90% of the bondholders have to
accept the exchange offer. That isn't likely. Bankrupcy is where GM belongs.

The offer on the table for the GM bonds is 225 shares per $1000 face of debt. If you look at a "reverse conversion" using the Jan 2010 (2 1/2) strike put and call, the synthetic GM can be created for $0.95...(buy the call, sell the put) that is what GM is worth. Let's call it $1.00 to keep things simple.

Since the debt is mostly $25 denominated that is 25/1000 x 225 = $5.625 worth of GM. These sell for around $2.20. (GMW as an example, but there are at least 8 others)

If you own GM common stock you should sell it today and either
do the Jan 2 1/2 put and call reverse conversion or even better, buy one of the $25 par listed bonds. Buy whichever is cheapest. They differ slightly in price because they will get accrued interest if converted. Check the propectus on the offer:

www.sec.gov/Archives/e...

May 01 07:37 AM

[JL:]

Syndicat says if I have GM common stock I should sell it. Unlike bondholders I didn't have a choice. I had over 750 shares of GM common stock in a retirement fund with Fidelity. It's so low that my only hope of recovering any of my money was to wait it out and hope GM doesn't go bankrupt and the stock goes up. I got a letter yesterday that said State Street Bank & Trust, an investment manager and independent fiduciary of GM, sold my stock on March 31st and deposited $1400 in an account for me. They said there is no more GM common stock in the fund. They tell me this a month after the fact. Apparently I had no say so in the matter.

May 01 08:07 AM

[a. palmer jr.:]

Remember that some of the bonds are extremely long term and weren't junk bonds when purchased, they were investment grade or some of the brokerage houses wouldn't have sold them in the first place. These bonds changed ratings almost overnight to junk. Also, these bonds weren't extremely high yield, they were just slightly higher than bank CDs, so the bond buyers weren't being greedy, just trying to get a little more interest. Remember also that bank rates have been down markedly since the S&L scandal, another government fiasco.
As I wrote in another article, don't count on me buying corporate bonds ever again, and I imagine others will be saying that too.

May 01 09:15 AM

[a. palmer jr.:]

Now that these deadbeat companies are out of debt, what happens when they start piling up the debt again...are we going to go through the same thing all over again? Is there a limit to how many times they can pull this on the public? Government can't oversee this; they're piling up debt of their own!

May 01 09:19 AM

[Gerry Sullivan:]

There is one GM $25 bond selling at $6. The symbol is GRM.
What is interesting about this one is that it is senior debt and matures on June 1, 2009, one month away. If the Chrysler bankrupcy gets sloppy, this GM bond might be paid off in a month. That is better than 3 times your money.

GM has stated that the bond will not be paid off. But, will they really decide to declare bankrupcy and enter Chapter 11?

May 01 10:19 AM

[helper:]

@JL "...my only hope of recovering any of my money was to wait it out and hope GM doesn't go bankrupt and the stock goes up."

Better read the sec filing someone linked above. 62Billion new shares are expected to dilute you out of $99 of every $100. Very little difference to common shareholders, Bk or not. Best case buy and hold will be for your Grt-Grt-Grt-Grt-Grandc... to get back to where you are today. Better ask your advisor if you are unsure what dilution means.

May 01 10:32 AM

[405388:]

Dear Alan,
please consider that when you buy bonds, you are not playing at las vegas casinò, but you give to GM the possibility to pay workers, supplyiers and tax, also very often (it's my case, I'm 60) your money are the sacrifices of your entire working life and you have no more chances to recover them. In the A,B,C, of the economy, the final product of an industrial activity is made by multiplication of labur, capital and organization and they have egual weight. I gave my capital to GM and I'd like to have the same chances of others. Or are we in a socialist country, where the capital must be killed?
Thanks

On May 01 03:39 AM Alan Young wrote:

> Most current holders of GM bonds knew they were buying junk bonds--already
> at a big discount--and took the risk willingly.
> By contrast:
> People who spent their lives working for GM did not expect that their
> pensions would be put at risk to satisfy investors; they paid full
> price (in labor) for their retirement benefits.
> Taxpayers likewise did not ask to be put at risk; it's been forced
> upon us.
> So IMO the disparity is not as great as the graphic suggests.

May 01 11:31 AM

[not so dumb...:]

I own more then $100,000 in GM bonds {bought at close to par} that are an important part of my own pension. The terms now offered---only 10-20% of the amount I paid for the bonds---while offering "50% cash plus 39% stake in a new GM" for the union---is so grossly unfair that it is completely unacceptable. One reason GM is in trouble is that they pay union workers 70-90% of their wages to just sit home during a lay-off. No company can survive under those conditions. The union is destroying GM, and I am very sorry to see that happen. I have always owned GM cars, and have been very happy with them. GM is part of the back-bone of America and I sincerely hope it survives. But future plans must be fair to bond holders!

May 01 02:19 PM

[connorport:]

The common shareholders take it as well. Bondholders sit back and wish for the shareholders to be wiped out so they can have more. This time the bondholders will go down as well and that's not fair? Its the risk that was taken. I've lost a good portion of my portfolio as well and some of my investments that didn't involve wiping out the shareholder proved to be fruitful to me while bondholders wanted me to lose everything. They got pennies on the dollar and i got a nice pop back after i averaged down and now i am up 200+% on that one. I don't feel sorry for anyone that wants everything only for themselves.
My advise would be to buy some puts to cover yourself in this case as we will see the stock under a dollar soon.



On May 01 02:19 PM not so dumb blond wrote:

> I own more then $100,000 in GM bonds {bought at close to par} that
> are an important part of my own pension. The terms now offered---only
> 10-20% of the amount I paid for the bonds---while offering "50% cash
> plus 39% stake in a new GM" for the union---is so grossly unfair
> that it is completely unacceptable. One reason GM is in trouble
> is that they pay union workers 70-90% of their wages to just sit
> home during a lay-off. No company can survive under those conditions.
> The union is destroying GM, and I am very sorry to see that happen.
> I have always owned GM cars, and have been very happy with them.
> GM is part of the back-bone of America and I sincerely hope it survives.
> But future plans must be fair to bond holders!

May 01 04:28 PM

[connorport:]

In the SEC filing it also states they will initiate a 100/1 reverse split after the dilution. I just cant feel sorry for these union workers who have raped and pillaged themselves out of a job and sucked their employers dry eliminating any hope their children may have a future in the auto industry and a fair chance to make a decent living. Same goes for the airlines. When you pay an American Airlines union baggage handler 90k a year at chicago o'hare you can expect to be outsourced quickly. And most have and i am happy for that as air travel has become more affordable to me and my company. I don't cry for someone who makes that kind of money and hasn't saved a penny or lives beyond their means. These people have also have the worst attitude to customers and are clearly overpaid for what they do. They make more for their lack of skillsets than anyone else yet they complain the most. I was in the union for 10 years and find it to be a joke in todays world.


On May 01 10:32 AM helper wrote:

> @JL "...my only hope of recovering any of my money was to wait it
> out and hope GM doesn't go bankrupt and the stock goes up."
>
> Better read the sec filing someone linked above. 62Billion new shares
> are expected to dilute you out of $99 of every $100. Very little
> difference to common shareholders, Bk or not. Best case buy and
> hold will be for your Grt-Grt-Grt-Grt-Grandc... to get back to where
> you are today. Better ask your advisor if you are unsure what dilution
> means.

May 01 04:40 PM

[connorport:]

In the SEC filing it also states they will initiate a 100/1 reverse split after the dilution. I just cant feel sorry for these union workers who have raped and pillaged themselves out of a job and sucked their employers dry eliminating any hope their children may have a future in the auto industry and a fair chance to make a decent living. Same goes for the airlines. When you pay an American Airlines union baggage handler 90k a year at chicago o'hare you can expect to be outsourced quickly. And most have and i am happy for that as air travel has become more affordable to me and my company. I don't cry for someone who makes that kind of money and hasn't saved a penny or lives beyond their means. These people have also have the worst attitude to customers and are clearly overpaid for what they do. They make more for their lack of skillsets than anyone else yet they complain the most. I was in the union for 10 years and find it to be a joke in todays world.


On May 01 10:32 AM helper wrote:

> @JL "...my only hope of recovering any of my money was to wait it
> out and hope GM doesn't go bankrupt and the stock goes up."
>
> Better read the sec filing someone linked above. 62Billion new shares
> are expected to dilute you out of $99 of every $100. Very little
> difference to common shareholders, Bk or not. Best case buy and
> hold will be for your Grt-Grt-Grt-Grt-Grandc... to get back to where
> you are today. Better ask your advisor if you are unsure what dilution
> means.

May 01 04:40 PM