"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.and from Business Week:
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"
"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.