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A Plan Emerges for Government Motors

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May 05, 2009 – Comments (4) | RELATED TICKERS: GM

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

4 Comments – Post Your Own

#1) On May 05, 2009 at 10:56 PM, russiangambit (29.33) wrote:

This comes so fast on the heels of Chrysler. I thought GM had until June? I guess, this caught a lot of people by surprise. Normally this type of shareholder wipe out happens on a weekend.

Anyone noticing the dominos being lined up - GM shreholder whiped out Wednesday night, bank results moved to  Thursday, jobs report is on Friday?

If market still goes up tomorrow with all of these, I am going to get more emergency supplies. When something so openly defies the reality, it means there is something serious going on beneaf the surface.

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#2) On May 06, 2009 at 12:23 AM, uclayoda87 (29.31) wrote:

Boycott GM and Chrysler products.  Don't reward bad behavior.

 

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#3) On May 12, 2009 at 12:42 AM, jgseattle (30.20) wrote:

Sad how contract law can be disposed of when the US government puts the screws down on people.

I agree this kind of strong arming will come back to bight the government when risk premiums start to increase due to the government treating debt unfairly.

 

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#4) On May 12, 2009 at 1:13 AM, angusthermopylae (39.70) wrote:

jgseattle,

If that was intentional ("bight") then it was a beautiful play on words...

The  forced "restructuring" of the restructuring, as far as who-gets-what, is something that will probably have a subtle, yet long term, effect:

--If creditors (as in bondholders, non-bank lenders and lines-of-credit) see a big company that even looks like a candidate for bankruptcy, they'll bail quickly...ensuring that a "might happen" is a sure thing.

--For a time, certain groups (Big Banks, unions) will walk around believing they are invincible--they'll get a better deal than anyone else...and walk right into the left hook of a backlash.

--Retirees...well, it depends on how it all works out for Chrysler.  If they get a sweet deal, they won't stand in the way of other government intervention...until there is none, and then the first group to get shafted really hard will raise the roof over the "evil corporation who let them down..."

As for the common investor...taken to the logical extreme, investors will run from bankruptcy-prone companies rats from a burning building.  If the lose because of bankruptcy, and lose because of share dilution (Chrysler, GM, and certain banks...), they will hasten the demise by dumping the stock...which will spook the creditors even more...which will screw the retirees...et cetera ad nauseum...

Just my deflationary two cents...

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