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I hate to say it, but if I was a GM bondholder I'd tell them to take their offer and shove it



April 30, 2009 – Comments (6) | RELATED TICKERS: GM


Several years ago I owned both General Motors and DaimlerChrysler bonds.  After witnessing the direction that both companies were headed first hand, I eventually decided take a small haircut and sell my bond holdings in both companies.  It wasn't easy to do either, their credit ratings had fallen to the point that I couldn't sell them on-line with a few clicks of the mouse like one can with most other investment grade bonds.  Instead, I had to place a call to a broker (yes on the telephone, how old school) and sell them OTC for what I could get for them.  Boy am I glad that I did, they are practically worthless today.

I hate to say it, but if I was a General Motors bondholder right now, and again thank goodness I'm not, I'd tell them to take their current offer and shove it.  The patriotic part of me feels bad saying this because a GM bankruptcy will have a negative impact on thousands and thousands of lives and it would be bad for America, but people who are Machiavellian are probably much more successful investors than patriots.  When people buy an investment like a senior bond they are supposed to be at the top of the capital ladder.  How can the government offer GM bondholders $0.10 on the dollar in equity in GM, not even cash, for their bonds and offer the UAW who is owed $7 billion less a 39% equity stake?

This offer makes absolutely no sense.  It's insulting.  I don't know what the liquidation value of The General is, but if I was a bondholder, as horrible as this is to say, I would probably rather take my chances in bankruptcy court than accept a deal like that.

On a related note, I told you that Chrysler was toast (see post: Chrysler is soooooo doomed).  A number of people gave me flack for making this call back in January.  I have seen this coming for a while now and first wrote about it here on CAPS a little over a year ago when I said the following (see post: Auto Industry Analyst: "current market for light vehicles in the U.S. is about as bad as I have seen it in the past decade."):

The one automaker that is probably in the worst shape right now is Chrysler.  It it absolutely shoveling money at its vehicles in the U.S. right now through higher incentives and it doesn't have any plans for outstanding new products that I am aware of.  New products are the lifeblood of automakers.  Without them, it is difficult to succeed in this market.  Compounding the lack of new products in the pipeline is the fact that the quality of Chrysler's current products is significantly below that of its competitors, especially the Japanese.

As someone who makes his living in the industry, I certainly derive no pleasure in being right about this mess.  It will be interesting to see how this story plays out and what actually happens to a major automaker that files for bankruptcy.  I fear that the process will not be nearly as clean or neat as many in the government believe. 

I actually am fascinated with the whole process, sort of like how some people find those disgusting body exhibits are fascinating and educational (they are one of my biggest personal pet I hate those things.  Nothing like exploiting dead Chinese people).

I'm sure that I'll have a lot more to write on this process over the coming weeks.


Related stories:

AP sources: Chrysler to file for bankruptcy

GM bondholders launch counter-offer

6 Comments – Post Your Own

#1) On April 30, 2009 at 11:28 AM, ldreher (48.06) wrote:

I am a bond holder and I feel I'm getting screwed in the deal.  I never imagined that a major US corporation like GM would be nationalized with bond holders getting screwed as if we were living in Cuba or some other banana republic.  I know I'm never going to get anything close to par but why would the UAW end up owning 39% of the company when the bond holders get 10%.  How can you say that's not socialism?

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#2) On April 30, 2009 at 11:43 AM, alstry (< 20) wrote:

If the government is eviscerating the value of bonds.....what the heck do you think they are gonig to do to  equity.....

And we are losing 2.5 million jobs per month....

only a Fool would advocate investing in the stock market right now.

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#3) On April 30, 2009 at 11:58 AM, checklist34 (98.57) wrote:

agree.  its a TRAVESTY of fairness, reason, morality, politics and more than the bondholders are getting so completely slaughtered while the Union is making out like a bandit.

the UAW is complicit in their failure.  Underworking overpaid employees.  In my time in industry i've heard amazing stories from tours of GM and other UAW factories.  1/2 the crew playing cards on the clock, people sleeping alongside the production lines or in the breakroom.  All while getting paid a MULTIPLE of what Toyota or Honda has to pay for workers with no doubt a better attitude.

And now the Obama admin seems to want to hand the union the companies as compensation for helping to destroy them, or, wait, i mean as compensation for campaign contributions and encouraging to vote Dem. 

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#4) On April 30, 2009 at 12:10 PM, devoish (67.86) wrote:

Maybe the GM's employees have already gotten the screwing and now the screwings are trickling up?

It doesn't require a degree in economics to figure out that workers making $14 per hour don't buy new cars. They don't buy homes, and they don't invest their savings in the stock market. They live paycheck to paycheck. Restricted income leads to boycott by default. The economic blowback won't end with the Detroit Three....

....The double whammy of free trade and de-unionization in the U.S. compounded the thrift paradox. The savings extracted from cheap, non union labor was invested overseas. The companies' thrift strategy undermined their most loyal customers--employees and communities in the U.S.

Please remember that Rick Wagoners executive pension, and there is more than one executive pension, will cost more than the salaries of the last 7000 assembly line workers GM hired.

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#5) On April 30, 2009 at 1:21 PM, Eudemonic (58.71) wrote:

So, the UAW and USA will own GM. No one will buy their products because of poor quality and higher prices. How's the new GM going to pacify (i.e. continue to pay) all those employees both union and non-union? Sounds like another subsidy in the making...

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#6) On May 15, 2010 at 4:07 AM, BrandonPaulChevy (< 20) wrote:

Well, I think actions should be done. GM has been the biggest car manufacturer for past the past century. And i think they deserve a chance to be reborned. Aside from this, they also are good creators of their car's Fuel Tank.

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