Bet on GM Bonds Expiring on June 1 21 comments
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Everyone assumes that GM is going to file for Chapter 11 bankruptcy on June 1. The company has even stated that it will file if 90% of the bondholders don't agree to the exchange offer of 225 shares of GM common stock for each $1000 of par value of bonds. That 90% exchange is very unlikely.
That leaves the question will GM really file? The bonds that mature on June 1 have $1 billion outstanding. There isn't another maturity until Jan 2011. If GM pays off these bonds, the company can avoid bankruptcy for 18 months.
The bonds are $25 par and trade at $2.50. It is most likely that GM will file bankrupcy, but if they don't, the bonds will be paid off at $25 each + the final interest payment 0f $.18.
That is a 10 to 1 payoff. Worth the risk. Symbol for the GM bonds is GRM.
Disclosure: Long GRM and BGM.
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Nonsense. GM's been bleeding cash for years. The only thing that's kept if out of bankruptcy these last 6 months has been government loans. The same would be needed going forward, regardless of GRM maturing.
I mean that there are no other bonds coming due for 18 months. If the Obama administration doesn't want GM in bankrupcy (for whatever reason) there are not other debt securities that have to be paid to prevent bankrupcy.
Of course GM will require a cash infusion. Reports this morning state that $30 billion will be available from the Obama administration.
GM will probably file bankrupcy. They have the option of not filing by paying off these bonds with $1 billion. That is why the bonds
trade at 3.
Jeanne Libit
If someone shorted the GM May 1 calls, those calls were exercised last weekend, leaving the seller short but unable to stay short.
Thus, the short was "bought in" which caused GM to rise. Trading desks seeing this imbalance unfold, probably jumped on the trade to profit.
I think that anyone who is long GM would be smart to sell the GM common and buy any of the $25 listed debt securities trading around $1.50, such as GMW.
Your conversion of bonds to stock is incorrect. Its 225 shares for every thousand in equity subject to an immediate reverse split of 1-100 with no credit for partial shares. Instead of 225 shares you get 2 and loose the other quarter share. Please review the perspectus.
These is the shares that will be owned by the UAW, US Government, and debt holders after either the exchange offer outlined in the S-4, or bankrupcy.
Remember that the GM CFO stated that the exchange in bankrupcy would likely be the same as offered in the S-4.
On May 22 09:36 AM Gerry Sullivan wrote:
> Based on the value of a reverse conversion on GM December puts and
> calls at the 2 strike price and adjusting for the 1 for 100 reverse
> split, the "new GM" will be worth around $80 per share.
> These is the shares that will be owned by the UAW, US Government,
> and debt holders after either the exchange offer outlined in the
> S-4, or bankrupcy.
> Remember that the GM CFO stated that the exchange in bankrupcy would
> likely be the same as offered in the S-4.
As to the "no fractional shares" this issue can be avoided by buying the right number of $25 bonds that results in an even number of "new GM" shares.
The options on GM at yesterday's close implied a value for GM of about $0.82. Today, that implied value is closer to $1.00...based on the cost to create "synthetic GM" by selling a put and buying a call at the same strike price.
There certainly is a factor of imbalance on GM because it is very expensive to borrow for short selling. Let's assume that GM is really worth about 60-80 cents/share. After the reverse split, that would be $60-80 for the "new GM."
Admitedly, a lot of supposition at work here. If you buy 160 BGM at $1.50, your cost is $240. You are buying GM at an equivalent of $0.2666. ($25x160=$4000 par = 900 GM) $240/900=$0.2666.
The bonds do NOT pay off in cash, but in a conversion to GM common stock (.6837 common shares per bond)
The ex-dividend date for the interest payment has passed (5/13/09).
Your story line is very misleading if you are implying a bondholder would cash in/out on June 1st. How did you get on this website?
GM has 30 days to delay payment without triggering a default under the bond indenture.
I have consistantly stated that GM will probably file bankrupcy. If they wish to avoid a bankrupcy in June, and try to work outside of bankrupcy court, they can do that by paying off the $1 billion of these bonds that are outstanding.
These bonds are the ultimate bluff. Does the Obama administration want GM to join Chrysler in bankrupcy? Or, would they prefer to keep working on a solution outside of bankrupcy court? They can pay off these bonds and no more bonds come due for 18 months. They might want that breathing room.
Remember, unlike Chrysler, these bonds are not held mostly by
"TARP banks" that were pressured to take the cramdown.
It's a shot. It's a long shot.
I continue to believe that GM bonds will be worth more in or out of bankrupcy than there current prices.
One final point: be careful if you buy GM bonds in the bond market.
They trade with accrued interest and in some cases the accrued interest is a lot of money that a buyer pays but will most likely not collect. These $25 bonds trade without accrued interest.
It does appear Doulittle is correct. Here is the exact verbiage from the prospectus of GRM found on quantumonline.com. The interesting point is that since GM can free-ly give away as much stock as they want to reduce their debt, this would incline one to believe the June 1st bankruptcy date could be pushed back. This may also explain why GM stock is trading upwards the last few days.
"The series D. debentures are convertible at a conversion rate of .6837 shares of our common stock..."
"Upon conversion of the Series D debentures, we will pay or deliver, as the case may be, per $25.00 principal amount of Series D debentures to be converted, for each trading day in the relevant 40 trading day observation period (as defined herein), cash in an amount equal to the lesser of $0.625 and the daily conversion value (as defined herein) of the Series D debentures and, if applicable, cash, shares of our common stock or a combination thereof, at our election, to the extent such daily conversion value exceeds $0.625"
bondholder elects to convert or is forced to convert. If the price of GM is above a certain price for 40 days, etc., GM can force conversion, but GM is nowhere near that price.
No bondholder would convert now, but would simply allow the bonds to mature on June 1, 2009. If GM does not pay them off at maturity, GM will be in default and the trustee for the bonds will
force them into filing bankrupcy after the lapse of the 30 day grace period.
But yes, they could buy back some of it on the secondary market. Other companies with debt trading at low levels have done thatrecently.
If we seek bankruptcy relief, holders of old notes may receive consideration that is less than what is being offered in the exchange offers, and it is possible that such holders may receive no consideration at all for their old notes.”