Neil Collins

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A haircut or a headcut for GM bondholders?

June 1, 2009

Bill Zastrow owns $240,000 of General Motors bonds. He’s not happy, but, as he told Reuters’ Kevin Krolicki, “We were getting the Marie Antoinette haircut and now it looks like it’s a few inches higher.”

The best guess is that his holding is now worth about $22,000, not far away from the sum he used to get in annual interest, but that’s better than the zero-to-$12,000 which the earlier offer to bondholders implied.

Perhaps the threat of the guillotine has concentrated the mind wonderfully, but the big holders have delivered a slim majority in favour of a deal which bears no resemblance to the legal rights enshrined in the bonds’ trust deeds.

One day, if New GM can become competitive again, their $27 billion of bonds may be worth as much as 28 cents on the dollar. That assumes the warrants for 15 per cent of New GM become worth converting and adding to the 10 per cent stake they are promised.

The moral of this story is that at the edge of bankruptcy, legal protection is likely to be overwhelmed by political reality. The big holders of bonds have other interests to protect, while the likes of Mr Zastrow have to take it on the chin. As he says, at least that’s better than lower down.