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.

Trading Obama: Solar Stocks, GM Debt, Ambac Calls, Lorillard and Goldman Puts

Jarret and Proximo: Thank you for your kind words. I do have another GM column in the works.

I will continue to write for Seeking Alpha when I have any free time away from my legal practice.

Trading Obama: Solar Stocks, GM Debt, Ambac Calls, Lorillard and Goldman Puts

Thank you for the comments everyone.

We'll see how big the next round of GM refinancing is. Right now the money has just been enough for an orderly shutdown of GM plants and to allow GMAC to start funding loans for the majority of buyers who don't have 720+ FICO scores.

This level of funding does not match the rhetoric of converting plants to make a new generation of clean and efficient vehicles that get America off its dependency on foreign oil.

On the plus side, the terms of the December financing were more favorable than I expected to GM shareholders.

OCT31 brings up a good point in his last comment: Bill Gross and PIMCO are big time holders of GM debt. Gross is a smart guy with a lot of influence, and his large holdings mean that he has an incentive to speak for the rest of us.

Payday for Car Contrarians

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

Trading Obama: Solar Stocks, GM Debt, Ambac Calls, Lorillard and Goldman Puts

I am not worried about new solar power market players. They money for expansion is just not there except for the established companies. It will be there again.

Obviously solar is not as attractive during a near depression and with energy prices dropping and credit tight for those with less than sterling credit. Most of the solar plays I follow have wisely scaled down, but have not stopped growing. They are still going forward with heavy R&D expenses, which is fat that can be trimmed in an exteme crisis.

However, long term interest rates are still low for (1) the US Gov, all the other big Western nations, and nearly all U.S. states (2) monopoly utility companies in the US and Europe (3) large non-profit organizations like universities, museums, and foundations. And they have no trouble getting financing and are all significant solar buyers.

For these buyes, record and near-record low interest rates mean financed investments in solar power will pay off. Lower prices are a good thing to stimulate demand.

Trading Obama: Solar Stocks, GM Debt, Ambac Calls, Lorillard and Goldman Puts

The various GM exchange notes are all pari passu, and generally trade that way. I believe XGM is one of the larger and more liquid issues, and keeping with one keeps commissions down and is less work at tax time. BGM is fine too.

Trading Obama: Solar Stocks, GM Debt, Ambac Calls, Lorillard and Goldman Puts

Bogey: I have no idea how GM debt will trade until Obama is sworn in. I'm slowly allocating profits from short position into long positions at current distressed prices.

I don't try to be perfect with timing. I try to buy XGM on days it hits new lows.

Trading Obama: Solar Stocks, GM Debt, Ambac Calls, Lorillard and Goldman Puts

Both Pelosi and Obama are not only in favor of a bailout, they are trying to get Bush to agree to one before January.

However I don't think there will be a bailout of GM until after Obama is sworn in. As bad as its cash crunch is now, it can easily last until then. So these notes may go lower in the intervening period.

Trading Obama: Solar Stocks, GM Debt, Ambac Calls, Lorillard and Goldman Puts

31Oct: Wouldn't a bankruptcy invalidate warranties (putting them on par with other unsecured debt), which in turn would prevent GM from ever recovering.

AIG, a much less important company in the eyes of the average voter has now Hoovered up $120 billion. If you forced me to guess, I think we'll see a recapitalization of GM by via a roughly $60 billion investment from TARP in exchange for 79.9% of the resulting common stock.

This would not actually cost taxpayers $60 billion, since many of GM's obligations would revert to the government anyway in the event of a bankruptcy, via the PBGC, medicare and medicaid, unemployment, food stamps, FDIC payments to Midwestern banks that GM would bring down with it, GM stockholders and bondholders deducting losses from their capital gains taxes, etc.

Trading Obama: Solar Stocks, GM Debt, Ambac Calls, Lorillard and Goldman Puts

31October:

There are two issues with coal, CO2 which is not toxic but causes global warming, and second a large number of other toxic pollutants. There is slow but study progress on the toxic pollutants issue, but coal plants are still by far the biggest source of mercury pollution.

And while natural gas is less dirty than coal for power generation, there is still the CO2 issue. Further, the major source for natural gas in Europe is Russia, which has repeatedly shown its willingness to leverage its CO2 supplies against countries that oppose its foreign policies. This is why Germany, which is in particular vulnerable to this type of economic blackmail, is such a big subsidizer of solar despite its relative lack of sunlight.

Trading Obama: Solar Stocks, GM Debt, Ambac Calls, Lorillard and Goldman Puts

Big Z: Given that Lehman unsecured creditors I think will get about 10 cents on the dollar (based on the CDS auction), and that lawsuits take a long time, I think the prospects of getting much back from Lehman are poor.

That said, I don't mean to say that JASO is a bad play right now, just inferior to the other companies I mentioned.

Non-I:

I disagree that GM will be allowed to file for bankruptcy. While the job losses could be minimized with a quick bankruptcy and subsequent bailout, the huge credit losses to banks, retail investors, mutual funds, and GM's gigantic supplier base would still occur. Its creditors, quite rationally, have been willing to extend payment dates knowing that they will recover little in bankruptcy.

The best case scenario here is really amazing. If GM gets enough money for AAA rating, XGM will go ABOVE par because of the 7.75% coupon, to something in the 28-31 range. And why not? If the feds are the major shareholder, it makes sense that this debt will become among the safest of all corporate debt.

Trading Obama: Solar Stocks, GM Debt, Ambac Calls, Lorillard and Goldman Puts

Tom: Also, Volker is respected now because he implemented a tight monetary policy when it was called for. Right now, we are facing rapid deflation. I hope he recognizes this.

Trading Obama: Solar Stocks, GM Debt, Ambac Calls, Lorillard and Goldman Puts

Tom: To be more clear, I think ABK will fail, but under the limited circumstances in which it does not fail, the stock could really do well. It's a very cheap hedge if you are short financials.