Ball bounces in GM bondholders’ bankruptcy-bound court
Holders of $27 billion of General Motors‘ unsecured debt have until midnight tonight to decide whether to exchange it for equity, and the chance that the once mighty auto giant will get the 90 percent participation it says it needs to avoid bankruptcy protection is looking just as remote as it did a week ago.
Based on its assets at the end of the first quarter, GM’s filing would be among the biggest U.S. bankruptcies ever, and could be one of the trickiest to work through among the myriad interested parties. Of key interest to markets is how much TARP money GM might need for DIP financing. GM cleared a key obstacle in its restructuring last Thursday when it reached a sweeping deal on concessions with the United Auto Workers. Canada’s union also says it is on board.
There are two big problems with leveling charges of obstructionism and intransigence at the thousands of GM bondholders. It’s a diverse group, so expecting a unified voice would be a stretch in any case. There are those who argue that all GM investors are being hurt and creditors shouldn’t expect to be spared. The problem is that the deal brokered with Obama’s task force attempts to save at least part of the company from an outright bankruptcy, preserving better assets for a new and improved company that bondholders would then own. Such a solution keeps bond holders from being able to sell them off for their pennies on the dollar. Instead it lumps them in with shareholders, but with none of the upside equity investors get for their risk.
Like many other interventionist policies in the engineering of the financial recovery for institutions deemed to big to fail, rewriting the rules and blurring the distinction between creditor and owner risks dragging the problem out over time. In a bankruptcy, even one with such far-reaching implications as General Motors, the system’s credibility itself is at risk. If bond investors start questioning whether their investment carries the same or higher risk than ownership, without the higher-octane opportunity to enjoy a profit-driven payoff when times are good, then the market for debt securities could be a quiet one for a long time.