Greg Weston

Trading the GM Bankruptcy

xoxoxo:

You make a good point about the Gov debt, which is supposedly senior to the notes. However the US Gov is planning to forgive half of it in bankruptcy. It may end up being more than half.

It also looks like the Gov is also gifting GM a few billion by taking up some of its warranty liability and subsidizing its suppliers. GM will also be getting below-market federal loans.

As for the dealers, is a GM franchise really worth that much? Shutting down Oldsmobile cost GM a little more than $1 billion. Saab and Saturn are getting sold, and only Pontiac is being shut down.

In the grand scheme of things I don't think the potential liability of the dealers will be material. Even if each closed franchise gets $1 million, that's still only 1100 * 1 million or 1.1 billion, and does not much affect my calculations. I think the actual number will turn out to be much lower than $1 million each, and of course whatever amount they get will be reduced by the bankruptcy court along with all the other creditors.

Some of these 1100 dealers are truly small. One dealer that was getting shut down that was profiled in rural Arkansas had a vehicle inventory of only 36 vehicles. A lot of these dealers will just go bankrupt, and their major creditor will often be the now majority government owned GMAC, which it is hard to imagine aggressively pursuing GM based on speculative legal claims that it inherited from bankrupt dealers.

Trading the GM Bankruptcy

Soliman: If you have shares in GM you should sell them immediately. They will likely soon be worth nothing.

As I mention in this article, if you want to invest in autos, I think your best bet is to buy GM retail bonds, which will likely be converted in bankruptcy into shares of the new company.

Trading the GM Bankruptcy

Some responses:

The UAW's retirement plans will not control the new GM. Trust law does not allow them to keep their assets in a single concentrated position. They will sell nearly all the shares they get as soon as they can. Press reports have confirmed this.

TX Publisher's calculations are wrong because they deal with current pre-bankruptcy stock. The reverse stock split would be in the event a deal is worked out that avoids bankruptcy, which I assume will not happen.

A new class of shares will be issued after bankruptcy to GM's current creditors. I don't know how many shares will be issued, so you can't even begin to talk about price of those shares, only the market cap of the whole company and what % note holders get.

Payday for Car Contrarians

I prefer automaker debt to stock. For more have a look at my article on XGM.

Default Risk of U.S. Automaker Debt: Too Big to Fail?

Bearfund: "largely control" does not mean "perfect control." And since we are mostly talking about after the 2008 election, the RSC types in safe districts will have even more power as non-RSC types in swing districts lose their seats to Democrats.

Cross-Profit: Even when foreign makers assemble their vehicles in the US, a much smaller % of the parts are made by US workers, and the design, R&D, and HQ jobs are mostly still overseas. The foreign makers also pay less and offer less generous benefits.

A collapse of the D3 simply will not result in an equal number or quality of US jobs at foreign automakers.

GM and Ford: Still Easy Shorts

What you are missing is the strong chance that there will be big subsidies to F and GM from the US Gov to the form of hybrid factory startups and national health care.

Both companies can and do produce a variety of good small cars, just not so far for the US market. GM is bringing over more and more of its Opels, rebadged as Saturns, and Ford has a number of good small cars in Europe and Latin America it will be bringing to the US in the coming years.