Monday, April 27, 2009

GM's proposal would give bondholders next to nothing -

GM's proposal would give bondholders next to nothing -
"General Motors' (GM) bond-exchange proposal Monday will play out as high drama this month. It's a showdown between unhappy bondholders and the company's willing-to-file-for-bankruptcy new CEO. And it could get bumpy.

On Monday, GM told bondholders they're about to get next to nothing — about 10% equity in the company — for the about $27 billion they lent GM.

By contrast, the U.S. Treasury would get a 50% stake and a GM promise to pay back half of the $20 billion in loan"
and from Business Week:
"GM /style>wants its bondholders to take 225 new shares of the company for every $1,000 in bond value. GM will also pay the interest. That adds up to at most 5¢ on the dollar for the debt, says Barclays (BCS) analyst Brian Johnson. That's what could make it a tough sell...

If bondholders refuse the offer, they will be betting that they can get more than 5¢ on the dollar in cash from a bankruptcy judge....

There is one other catch. Some bondholders own credit default swaps, which amount to an insurance policy on GM bonds that pay in full if the company goes bankrupt. Tim Backshall of Credit Derivatives Research says that there are contracts backing an estimated $2.7 billion in bonds on the market. If those contract holders all hold bonds, it won't take too many more bondholders to refuse the deal and send GM to bankruptcy.

A note to all of my classes: be prepared to talk about this one! At the bare minimum I will ask you if you were a bondholder, would you accept the offer or would you force bankruptcy and why.

1 comment:

Anonymous said...

I am a bond holder and I did receive the offer from GM for 225 shares of common stock for each $1000 of my bond. What a slap in the face. Then the they turn around and talk about a reverse split of common stock at a ratio of 100 to 1. I guess they figure we are dumb enough to take 2.25 shares of common stock, which will soon be nearly worthless after the water it down by spreading to the union and the government. I believe the government is back of all this and they consider our retiremnt money just speculation.
The union which has over the years made rediculus demands on the company and is responsible for we are, the government wants them to end up with most of the proceeds.
I suspect this is pay back for all their political contributions.