When bankruptcy is good for bondholders

May 28, 2009

I’m fascinated that after roundly rejecting GM’s offer to swap their bonds for equity in the existing company, GM’s bondholders seem to have embraced with alacrity GM’s new offer to swap their bonds for equity in a new, post-bankruptcy company. It’s increasingly obvious, it if wasn’t clear all along, that the old exchange offer was in neither GM’s interest nor in that of the bondholders, and that bankruptcy is necessary to allow GM to shed certain obligations — especially obligations to its dealerships — which would otherwise hobble it for the foreseeable future.

The new plan essentially constitutes the nationalization of GM: the US government will own 72.5% of the common equity, plus another $2.5 billion in preferred stock. I can see why bondholders like it: the US will be extremely hesitant to let any state-owned company default, and it won’t sell off its stake until GM’s future viability is assured.

Everybody was worried that a GM bankruptcy would be vastly more complicated and fraught than the Chrysler bankruptcy, given that it has orders of magnitude as many creditors as the private Chrysler. But today’s news gives me some hope that both bankruptcies might go relatively smoothly, as planned and hoped. Although I still have no idea why GM’s shares are trading at over a buck apiece, valuing the existing common equity — which will be wiped out — at more than half a billion dollars.


Comments are closed.