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Between The Numbers is an engineer by profession, an economist by education and a quant at heart. The author is a hardcore Free-Market advocate and a weak form Efficient Market theory advocate.
  • GM changes course, offers bondholders significantly more in pre-bankruptcy talks 0 comments
    May 28, 2009 6:11 PM | about stocks: GM


    I commented earlier about how the previous restructuring offer to bondholders was both unacceptable and indicated a position of bad faith on the part of GM, using political concerns to gift unions a much larger share of the new GM. It seems that the government, having taken a deeper look at GMs books, may agree as well. From the NYT article:

    It said the government, which will provide bankruptcy financing of about $50 billion, initially would hold 72.5 percent of G.M., with the United Automobile Workers union receiving 17.5 percent, and bondholders and shareholders receiving 10 percent

    But the percentages held by the bondholders and the union could conceivably be larger because each are being offered warrants in the new G.M., which would be created in bankruptcy.

    Under the terms of the plan, bondholders would initially receive 10 percent. They could then exercise their warrants for an additional 7.5 percent when new G.M. rises to about $15 billion in value. The second set of warrants for the final 7.5 percent would be exercisable when new G.M. rises to $30 billion in value.

    The union would initially receive a 17.5 percent stake to finance a health care trust for its retirees. It has also received warrants to raise that holding to 20 percent — but as Thursday’s filing made clear, those warrants are exercisable only if new G.M.’s value hits $75 billion.

    The $50B debtor-in-possession loans that the government would provide would likely not be the last credit that GM would need for the future. Unless the government was prepared to pour unlimited funds in whenever GM needed them, assuaging the fears of the credit market was necessary to enable GM to get private financing in the future.

    Additionally, every dollar the government contributes causes it to become an even larger “reluctant shareholder”. This is a giant political risk for the government – if it attempts to exercise control over GM’s decision making, then GM will be quasi-nationalized and the market will view it with suspicion. On the other hand, if GM closes plants and lays off workers that are constituents of powerful political figures, there will be a cry to use government ownership to prevent GM from executing its cost and capacity reduction plan. The conflicts of interest could be quite challenging – what if what is good for GM (and the US stake as a shareholder) is not good for a city or state where the plant closures occur? A Representative or Senator cannot credibly claim that “we have no control over GM” (not with a 70% stake and a CEO firing under their belt), and would look powerless were they to allow a plant closing without at least a fight. How about a demand for gas guzzling (but higher profit) SUVs? Would the Obama administration block widespread production and sales of those vehicles due to environmental or energy dependency concerns? These examples just scratch the surface of the potential conflicts.

    In order to minimize this political risk, the government needs private capital to come in and help make the tough choices required for this restructuring. By giving the debt holders a much better deal (especially when compared to the previous deal where equal status creditors got way more), there is a much better chance that future debt or stock issues by GM will be positively received by the market. The sooner the government can divest itself of majority ownership, the better it will be for everyone involved.

    Disclosure: Minor indirect holdings in GM debt through various funds


    Stocks: GM
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