GM: To File or Not to File, That Is the Question

Let me start by saying that GM will probably file Chapter 11 bankruptcy - either next week or sometime in the next five weeks.

They clearly prefer not to file. A bankruptcy filing for GM will create a lot of problems, many more than the Chrysler filing. There are moms and pops and pension funds who own the debt. Not just greedy speculators, the Obama term for the Chrysler secured lenders. These lenders might sue and get a court to grant an injunction.

I have recommended purchase of two different GM bonds that are $25 par value. One is the GRM which matures on June 1, 2009. This is the one that GM says it will not pay at maturity and will cause them to file bankruptcy. Yesterday we got preliminary results on the offer GM made in it's S-4 filing and those results indicate that "single digits" of bondholders tendered for the offer that required 90% acceptance.

The other bonds are part of a group and include symbols like BGM, XGM, GPM, GXM, GMW, RGM, GMS, HGM. These trade around $1.75 and have yields of around 100% if GM doesn't file. Remember, I started by stating that GM will probably file.

If GM doesn't file any of these will be a home run. In the upper decks. If GM does file, then the bondholders will go through bankruptcy and wind up with stock in the new GM. I think that stock will be worth more than what a buyer pays for these bonds.

Holders of GM common stock should sell the stock tomorrow and buy whichever of the bonds listed above trades at the lowest price. The stock will have some future value (think about the tax loss carry forward) but the bonds will fare better.

I do know about the proposed 1 for 100 reverse split. That is really an accounting issue and doesn't affect the bonds negatively. It may actually create some demand if GM remains in the Dow Jones Industrial Average and ETFs have to buy more shares.

Disclosure: Long BGM

Comments

[Taymere:]

sell the bonds!!!! sell now!!! no price is too low. Especially your GRM please

May 27 04:55 AM

[Gerry Sullivan:]

If GM files, GRM will be no better than the others. A bit worse, in fact, because it pays the lowest interest rate, 1.5%, and the accrued but unpaid interest might be a factor in the ultimate workout. If GM doesn't file, GRM will be the best, paid off at $25.

I originally recommended a blend of 4 BGM (or equivalent) for each 1 GRM and that gave me an average cost of $1.58 per $25 par.

If you shoot craps (a very appropriate comparison) this is like placing a bet on the number 8 and another bet on the "hard 8."
GRM is the "hard 8."

If you are starting right now, it probably is best to buy one of the
$25 par bonds that trade around $1.75.

May 27 08:24 AM

[418653:]

you used to be long on BGM and GRM, did you sell your GRM?

May 27 03:07 PM

[418653:]

you used to be long on BGM and GRM, did you sell your GRM?

May 27 03:07 PM

[Gerry Sullivan:]

I did sell GRM. I am long BGM and may repurchase GRM.
The GM $25 par bonds selling for around $1.85 are the best play.
The GRM could be an instant score, but higher risk also.

If GM pays off the GRM I will be kicking myself, but then the others will still be paying the interest which is close to 100% annually.

I now plan to buy more of the lower priced $25 par bonds if GM files
bankrupcy.

May 27 07:14 PM

[Gerry Sullivan:]

Thursday morning. GM is amending exchange offer. One fact that all the commentators have missed is that GM has the month of June to
work out a deal with GRM holders even though the bonds mature on June 1.

I now think that GM will possibly offer more to the holders of GRM after the June 1, 2009 maturity date passes.

May 28 09:48 AM

[Gerry Sullivan:]

Sold half my BGM position at $2.39...

May 28 11:16 AM

[JCC:]

Gerry - Why is it that GRM is down, yet all of the other GM bonds are up ~25%?

The morning news is the obvious cause of movement. An analysis of this movement would be interesting, and possibly profitable.

May 28 11:27 AM

[Gerry Sullivan:]

If GM files Chapter 11 bankrupcy, which now seems almost certain, the GRM will not be worth any more than the other $25 par bonds.
Based on the expectation of a GM bankrupcy, the price of the GRM and the others will converge.

GRM is still trading a bit higher than the others like BGM because there is still a slim chance that GM won't file.

May 28 01:55 PM

[JCC:]

Gerry,

I notice that GRM is not listed this morning. I guess that bonds don't trade the day before the end of the term?

I also see that nearly all of the other GM bonds are down ~10%.

With the bankruptcy planned for Monday, do you think that these bonds are a worthwhile investment today?

May 29 09:52 AM

[Gerry Sullivan:]

I sold all of mine. I think that the GM bonds are a good investment, but I am a trader.

I was not able to find the new symbol for GRM.

May 29 11:17 AM

[JCC:]

Will they be trading on Monday?


On May 29 11:17 AM Gerry Sullivan wrote:

> I sold all of mine. I think that the GM bonds are a good investment,
> but I am a trader.
>
> I was not able to find the new symbol for GRM.

May 29 12:17 PM

[Gerry Sullivan:]

I think they will be trading on Monday, but symbols may be different.
The symbols may be changed if GM files bankrupcy.

The GRM is not trading because trades would settle after the maturity. It will probably resume trading on Monday.

May 29 12:56 PM

[M.R. Henderson:]

Looks like it's believed bonds will pay 10%. Any word on new symbols?

Jun 02 10:02 AM

[JCC:]

Gerry - I notice that most GM bonds are not listed today. They were listed yesterday. I guess that they will get a new symbol.

Jun 02 01:43 PM