Ball bounces in GM bondholders’ bankruptcy-bound court

May 26, 2009

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.

3 comments so far | RSS Comments RSS

The offer to the UAW. 20Billion debt = $10 Billion CASH and 39% of the new company.
The offer to the government. $15 Billion debt = 50% of the new company AND half of the debt (7.5 Billion) remains owed.
The offer to the bondholders $27 Billion debt = 10% of the new company.

I’m a bondholder. I was offered 225 shares of the new GM for every $1000 GM owes me. In the fine print, this agreement comes with a 100:1 reverse stock split. This means for every $1000, I get 2.25 shares. If the shares double in value, that puts me at roughly $5 for every $1000 I am owed.

Before anyone villainizes the bondholders for “pushing GM into bankruptcy”, realize the offer we are given is neither fair nor equitable. The Fed gets 18x the return per dollar than the bondholders and maintains debts owed to them. The UAW gets 50% of their debt paid in CASH, AND they get more than 10x the return per dollar than the bondholders.

The bondholders stand get pennies, maybe less than one penny per dollar, and they’re being chastized for not jumping at the opportunity.

Let’s make sure we see honest analyses of the offers, please.

Posted by GM_Bondholder | Report as abusive

Why should the bondholders get screwed? We did not drive the company into the ground as the management and UAW did nor did we impose government regulations which effectively did them in (CAFE rules). We loaned them money with the understanding that if they went bankrupt we would be first in line to recover whatever assets remained–normal rules of business. I purchased $20,000 of bonds at face value plus commission. I have collected interest for a number of years but nowhere near the profit to be gained by the UAW and gov. We are getting screwed.


The entire financial system is messed up. Some of the officials do whatever they want one case after another and follow no rules. Where is our judicial branch?

Look at Wamu. Sheila Bair wiped out all bondholders. Then she turned around and set up TLGP to guarantee bonds for other banks.

Truly sad that was all done in the open… and this one too

I know this may not be much comfort but luckily you still have a choice. FDIC would have wiped you out and left you in the dust.

Good luck


Posted by PPY | Report as abusive

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