And why wouldn’t they? As attractive as 30 cents on the dollar for equity in a firm that has five frantic days to produce a viability plan is, there seems to be some . . . hesitation. The Detroit News reports that GM is trying to finagle a $9.2b debt for equity swap with the holders of its unsecured debt to fulfill the requirements for federal loans. According to the usual anonymous sources, bondholders are holding out for 50 cents on the dollar. They say the figure mirrors the value of concessions being negotiated with the United Auto Workers. (Sound familiar?) Luckily bondholders seem to have an ingenious solution for the UAW-bondholder deadlock: the government could just lend GM more money. This is some seriously high-stakes poker.
Technically, a failure to extract concessions would trigger a recall of the government loan, forcing GM into bankruptcy. In this scenario, unsecured debt holders would receive nothing. But bondholders argue that the UAW is only conceding 50 percent of its pension obligations, while they are being asked to erase 70 percent of their debt.
“We tend to side with bondholders in these negotiations,” says JPMorgan analyst Eric Selle in a research note. He notes that JP Morgan is “very encouraged by the pattern of UAW concessions,” but that they do not equal the sacrifice being asked of bondholders.
Lemos Stein of S&P adds that “the health care liabilities that are also potentially being reduced as part of this plan would, in a bankruptcy proceeding, be unsecured claims, so that makes them similar to the unsecured debt held by the bondholders.”
The multi-billion dollar question that remain: how will this stalemate be perceived in DC?
With a contentious stimulus bill going into conference committee, the automaker loans could well be recalled as a concession to Republicans to grease the wheels of the stimulus bill. The UAW and bondholders may not know how to compromise, but DC politicians do. And holding the firm hostage won’t rub them the right way, especially considering that a recall would leave both the feuding sides with nothing.
Somebody wake me when this is over. As has been mentioned previously by many in this forum, once the government publicly stated the auto companies would not be allowed to “fail” all bets were off. Now we keep feeding the crack addict more crack instead of helping him to kick the habit.
+1 TexN
I should keep a stockpile of canned comments to this stuff somewhere…..
No C11, more money, all this drama just for the appearance, by DC and DTW, of “doing something.”
TexN is right. What a disaster. The government is doing nothing to help the carmakers. It pisses away billions without solving the big problems GM and Chrysler face. What do Harry Reid and Nancy Pelosi know about running a business?
C11 with government sponsored debtor-in-possession financing it is then. That way everyone gets a nice hose down.
tesla deathwatcher, “What do Harry Reid and Nancy Pelosi know about running a business?”
Probably not much. But Barney Frank has a boyfriend with executive experience from Fannie Mae….
Why would Democrats concede anything to the Republicans? They have about 18 months to do whatever they want to do, without having to worry about pleasing anybody.
Please, during next election, vote against the incumbent. These NSFW politicians think they have quasi UAW job security. This assumption needs to be disproven at great haste.
Fincar1: and Barney’s former boyfriend knew how to run a male escort business out of BF’s basement.
Maybe they could get him to be car czar
Ok, This stuff is way over my head.If the bond holders push GM over the edge,do they get zilch?
So they get 30 cents on the dollar and they want 50 right?If they settle for 40cents isn’t it better than SFA?
In the event of chapter 11 do they get in line with the rest of us?I’m sincere with this could one of the better informed please explain this to me in layman terms?
Thank you
Michael
The first one of the three to go C.11 will be the best off. Ford is in denial that they won’t need help, and Gm and Chrysler are currently in a race to see who can fold first.
C11 will save them!
Like I said earlier, the Mortal Kombat reference is apt, because MK publisher Midway filed for C11 today.
Hoo boy, the comparisons are very apt here…
Mikey: looks like you have it all figured out. Don’t worry, some confusion is normal. We’re not in the real world anymore, Toto.
I’m convinced there’s got to be some particular aspect of C11 that we’re overlooking that would explain why the bondholders are holding out here (at least something beyond a simple game of high-stakes “chicken,” I think).
The best reason for the holding-out that I can see is that GM’s equity holders are already undersecured–meaning that GM is now worth less than its secured debts are–and a debt-for-equity exchange would give the bondholders a very late priority security interest in the already overtapped assets of GM. In short, their “equity” in bankruptcy would probably ultimately end up as unsecured credit. Of course, they would then have the unsecured interests plus the 30 cents on the dollar, so that doesn’t really explain it. Does Mr. Tilton, or any other bankruptcy experts out there, have additional insights?
@ HarveyBirdman
As I understand it, in Ch11 the debtors line up in order of seniority to have their claims heard by the court appointed Judge.
As Ch11 assumes that a restructured business is a “going concern” the debt holders are forced to negotiate amongst themselves (for a time) or then ordered into an arrangement, again with seniority taken into account.
Equity (stockholders) are wiped out immediately.
Unsecured debt holders might feel they can get more than 30 cents in the dollar in a Ch11 “going concern”, but then the bankruptcy judge might wipe them out too if they can’t make an arrangement.
If you took stockholder equity now as bond holders are being asked to, and Ch11 still occurs, you are most definitely wiped out.
High stakes poker indeed…
This might be completely wrong. I’m Australian after-all!
BTW, in Australia, employee’s are considered secured creditors (to a point) even ahead of our own Tax Office (IRS).
Ah, of course, I mixed up secured creditors with equity holders, who are the shareholders (thus proving that I am no bankruptcy lawyer). That would definitely create a serious disincentive to swap debt for equity, since even as unsecured creditors they have a remote chance of getting something out of the bankruptcy proceedings.
And in America, employees and pension plans are ranked behind traditional secured creditors, but well ahead of run-of-the-mill unsecured creditors. I have no idea where the taxman falls in line.
Thanks to the Australian for setting the American lawyer straight!
I am a bondholder (bought a small amount at 10 cents on the dollar), and here’s my thinking regarding chapter 11. Without chapter 11, bondholders are being asked to take 30 cents on the dollar, the UAW 50 cents, and suppliers will be getting 100 cents for accounts receivable. In a prepackaged chapter 11, all these accounts are treated equally as unsecured creditors. So, a chapter 11 may actually help bondholders. The UAW and suppliers have much more to lose than the bondholders, so they have a much bigger reason not to allow a chapter 11. I figure the following odds for various scenarios:
1) Chapter 7 liquidation=no value for bonds= 20%
2) No bankruptcy, debt for equity swap @ 25 cents/dollar, 30%
3) Prepackaged bankruptcy, 40 cents/dollar (10 cents cash, 30 cents new bonds), 50%
So, all in all, that is why I bought at 10cents on the dollar, and why Chapter 11 won’t be so bad.
@ gsorter
Very interesting, thank you. Just out of curiousity, do the bonds you hold have a yield on them? Do they have a maturity? And then finally, do you know how/if the yield/maturity is carried over in your scenario 3?
Pch101 also does a good line in Bond Discussion. I’m hoping he/she is reading.
Thanks for spelling that out, gsorter. The holding out makes a lot more sense when put in this context. I really should just stop trying to post and wait around for more experienced folk to shed some light on these issues.
Pete,
I have what are called “baby bonds”. They trade on the NY stock exchange like regular stocks, and have a $25 face value. I have 2 different ones,
GPM, which pay $0.65 every 6 months. These mature in 3/2032, but the holder can force the company to buy them back at face value March of 2014 assuming GM isn’t bankrupt. Current price is $2.82, so about $.11 on the dollar. Yield is then about 46%
The other is CYP, which is a fund holding nothing but GM bonds maturing in 6/2024. These pay $.92 cents every 6 months and trade at about $2.60 or just over $.10, and the yield is about 71%.
No one in their right mind expects GM to keep paying on these, but every time they do is a huge chunk of change. All GM bonds (except the bank loans) are senior, unsecured and at the same seniority level, so they all have the same value in a bankruptcy.
@ gsorter
I greatly appreciate that insight. Morbidly fascinating in fact.
The problems and extent of servicing that GM debt are just staggering.
Thanks gsorter, I am also a newbie bondholder who just bought at 9 cents/$. I largely concur with your analysis, however I view Chapter 7 as a very very remote possibility. For political reasons the only way President Obama and Congress will let this go before a Chapter 11 BK judge is if they are absolutely sure that there is no way that things could turn south and head for chapter 7. Ch.7 means they lose reelection for sure. They know it, and unless they can get institutional investors fully on board with a wide margin of safety they won’t dare approach a judge. I think there’s at least a 80% chance that this is done out of court, in which case we retail investors won’t be forced to exchange our bonds and we win big time. 80% dividends forever and 10x price appreciation. As soon as President Obama fired the CEO and changed half the board Obama effectively became GM’s boss, GM became his administration’s responsibility. After he fired Wagoner is when I started buying GM debt. I am buying more Monday. I know Obama can have some $$$$$ printed to make this a sweet deal for me. This works well for the administration too, the President doesn’t want the little old lady from Duluth shedding tears on the national news about the haircut Obama forced upon her. In contrast, institutional investors don’t make good victims for the media because they have CDS insurance and get paid more than 100% any way you slice it. An generous out of court settlement benefits everyone, except of course the taxpayer. That’s why Obama fired Wagoner, to show voters that he doesn’t take wasting tax $ lightly. I really respect his political acumen. I have made more money in 2009 than I’ve ever made in my life. The Government is so much easier to read than a balance sheet.
Taymere,
One other thing to keep in mind. As I understand it, AIG has been a big provider of “Credit Default Swaps” against GM bonds. If so, if GM went chapter 11, those bondholders would get 100 cents on the dollar from AIG! So, the government would in effect be giving those bondholders a reason to force the company into chapter 11. What a tangled web. Have you also considered the bonds maturing June 1 2009 (GRM)? Those are $0.28 on the dollar now. In just over a month they will be worth either close to zero, or $1.00. Very high stakes poker, but if your odds are correct, a way to triple your money.
Thanks for that tip on GRM gsorter, I hadn’t noticed the fact that I would be redeemed in cash not shares. That’s great, I’ll look into it and will probably bite below $4.50 or so.
Speaking of AIG, here’s a tip for you, Monday is ex-dividend day for AIG-A. It yields > 100% annually right now so it’s quarterly dividend alone will be > 25%. It is a mandatory convertible, but don’t stop reading yet, hear me out. It’s selling for ~$6 right now, it’s original face value was $75 and it converts in 2011 into $49.34 worth of AIG common shares at whatever price AIG common shares are selling for in 2011. You can immediately sell those $49.34 worth of common shares for a 8x payoff in two years, not counting the fact that the > 100% dividends will have paid for your initial investment a few times over by then. AIG has 1.6 trillion dollars of CDS policies left to unwind. There have been numerous firm public pledges to the credit rating agencies by both Geithner and Bernake that AIG will pay it’s debts “…as they come due…” I think either we’ll get that payoff in 2011 or we’ll have plenty of warning ahead of time. If not, financial armageddon has arrived, we’ll all be trading cowrie shells and chickens and I’ll spend my time poaching deer and growing vegetables rather than investing.
I actually hate giving my AIG-A analysis away publicly because it’s illiquid and I am still accumulating it. My email is taymere@gmail.com, if you send me your email address I can bounce ideas off you without alerting the masses.