When bankruptcy is good for bondholders

By Felix Salmon
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.

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Comments
6 comments so far

Felix

Been trying to reach you.

Doug McIntyre
24/7 Wall St.

Felix,

Been trying to reach you.

Doug McIntyre

24/7 Wall St.

If the govt could give $20 billion to GM, why didn’t they just pay the bondholders first and get of debt? We put more money in and yet they are still going bankrupt? Does this make any sense? This is just a power grab using the govt to confiscate private property and redistribute it to other people (like Chrysler to the Italians).

Posted by Luis | Report as abusive

I think the prior offer was 10% of the new company. Had to be or it’s monkey gibberish. Some of the debt will also carryover to the new GM, which means this was a negotiation all along, not a case of ignoring legal principles but a fairly typical negotiation on a grand scale.

Posted by jonathan | Report as abusive

I’m not sure why you see things this way. The bondholder got the same exchange on their debt. So the only new provision is the warrants that were issued. Other press has reported that these warrants cannot be exercised until GM’s market value reaches 15 billion (current market cap is around .75 billion). I’m not sure how to price the option value of these warrants, but I can guarantee that they are worth very little. How long are these bond holders going to hang around? The seems like a lot of new value creation for a company that is struggling so badly.

Posted by chappy | Report as abusive

I’m curious about the dealership position. The dealers publicized in the press seem to indicate that they cost the auto manufacturer nothing (not sure about that) yet are profitable (I’m getting ready to buy a car from a soon-to-be shuttered Chrysler dealer with that story). I suspect that too many dealerships in the era of the Internet cost them margin on vehicles as customers better comparison shop. But there has to be more to that story. Does anyone care to enlighten?

Posted by Curmudgeon | Report as abusive
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