A Plan Emerges for Government Motors
May 05, 2009
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Details are sketchy, but there is apparently a restructuring plan out for GM.
According to this Reuter’s report and this AP report, the deal would virtually wipe out existing common stock holders. No one should be surprised by that.
Per the reports, the government would end up with a 50% stake, the Union 39%, private bondholders 10% and current shareholders 1%. Where it gets very really interesting is the write-offs each group takes in the plan.
Per the AP report, the government will exchange about $10 billion of its GM debt for 50% of the company. Reuters doesn’t give the gov’t share, but puts the total debt forgiveness GM is looking for at $43 billion – back out the other two groups and that’s consistent with government forgiving $10 B in exchange for a 50% equity stake.
The UAW will take the 39% equity stake in place of $10 billion GM owes the healthcare trust fund.
Private bondholders are being asked to forgive at least $24 billion in debt in exchange for 10% of the company.
Anyone else see anything wrong with this breakdown? I don’t know where the UAW claim falls in the capital structure, but the gov’t debt and private debt should be roughly equal in seniority. But, the gov't gets 50% for $10 billion, private bond holders get 10% for $24 billion. Treasury is getting 12 times the stake in GM for each dollar of debt it forgives compared to private bondholders. Treasury also gets a better deal than the union, but only about 25% more bang for the buck.
Anyone holding GM bonds at this point had to know they were never going to see face value. But they should expect to be treated fairly in any settlement agreement. One-twelfth what the gov't gets for similar securities and one-tenth what the union gets is not fair treatment. If this type of cram down on debt holders stands, expect corporate credit markets to freeze up solid. If bonds can’t be expected to be senior securities, lenders will demand substantial risk premiums or they’ll just stop buying bond issues.
Disclosure - I have no position in GM stock or bonds
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