Does GM management (or the Feds) WANT a prolonged bankruptcy?

[DSeid]

GM makes bondholders an offer they can refuse today.

The company offered to exchange 225 common shares for each $1,000 principal amount of outstanding notes - about 6.1 billion shares all told. The government and union pension plans claims would be converted to another 54.4 billion shares on top of that, leaving shareholders with about 10% of the company. The offer would conclude with a 100-for-one reverse stock split to bring the share count down to about its current level.

GM’s current market capitalization of $1.28 billion, which is priced to include the current debt sitting above it, implies holders of the company’s $27 billion in bonds would get approximately half-a-cent on the dollar for 10% of the company.

Gimme Credit analyst Shelly Lombard’s back-of-envelope calculation of best-scenario equity worth of the deal still only put it at 7.7 cents on the dollar.

The General Motors Corp. ad-hoc bondholder committee plans to have an internal conference call later Monday to discuss the automaker’s debt exchange offer.

According to a person familiar with their thinking, the group is hoping that GM and the government’s task force is open to some sort of negotiation.

“It looked like they were going out of their way to make it unattractive and it was designed to fail,” the person said.

Allegedly the Feds wouldn’t allow a more generous offer.

90% of bondholders taking that? No way.

The current offer is neither reasonable nor adequate. Both the union and the bondholders hold unsecured claims against GM. However, the union’s VEBA would receive a 50 percent recovery in cash and a 39 percent stake in a new GM for its $20 billion in obligations; while bondholders, who own more than $27 billion in GM bonds and have the same legal rights as the unions, would only receive a mere 10 percent of the restructured company and essentially no cash.

The offer was made unilaterally, without any prior discussion or negotiation with bondholders and in spite of repeated calls for dialogue.

Bondholders and GM have the same basic goal - to restructure the company in a consensual manner, thereby creating a leaner, more competitive GM. In order for GM to emerge from this restructuring process as a profitable entity, all stakeholders should be prepared to make deep, yet equitable, sacrifices. Bondholders remain willing to make such sacrifices and ask only that others do as well.

We are deeply concerned that GM waited until late April to make its offer. GM CEO Fritz Henderson even admitted that getting 90 percent of the company’s bondholders to agree to a debt exchange within a month would be ‘a tough task,’ given the company’s large amount of retail inventors, who hold some $6 billion in bonds.

This offer demonstrates that the company and the auto task force, unfortunately, are pinning their hopes on an extremely risky and legally questionable turnaround in bankruptcy court, instead of engaging its lenders and workers in the very type of negotiations that could avoid such a fate.

That’s the biggees talking. And the smaller retail bondholders are not going to jump unless they hear that the biggees all are and maybe not even then.

So what’s up with this lowball offer of a significantly bigger discount than what these bonds currently can be sold for and why did they rise modestly on the news? The only way that a prolonged bankruptcy can be avoided (which would bring down more than GM) is if the bondholders agree to some terms. They’ll take a discount. 33 cents on the face value dollar, sure. 25 maybe. Half-a-cent? Uh uh.

This just seems very odd.

Really, I’m trying to figure out the angle. And the least crazy concept is that this is to get political cover. Make the offer that protects the union and have it not work and let a bankruptcy judge impose a solution that the bondholders can accept an screw the union then under the guise of hey we tried but the judge says this is what is fair.

If so it is a dangerous game.

[smiling_bandit]

Well, GM is pretty obviously just trying to avoid actually doing anything substansive at this point.

[AdmiralCrunch]

@DSeid

They’ll take a discount. 33 cents on the face value dollar, sure. 25 maybe.

Cite? All the hemming and hawing about $70 an hour to do nothing and those no-good unions is hiding the fact that the bondholders haven’t made any concessions in their risky investment, and they’d be getting closer to $0 if it weren’t for federal cash. All I can find is theyturned down $0.30 on the dollar earlier this year, when things were less dire.

@smiling bandit

Well, GM is pretty obviously just trying to avoid actually doing anything substansive at this point.

Like firing 21,000 employees, shutting down Pontiac, Saab, Hummer, and taking 10 billion in healthcare costs off of their books?

[Frank]

Today proved to me that Wall Street is insane.

Each share of current GM stock would be devalued by this deal to (at today’s open) 1.7 cents! It will also reduce the control of the company value of those shares by 1/100. (Current stock owners will own 1% of the stock if the deal goes through.) What does Wall Street do?

Bids the stock up 20%. Can’t anyone do arithmetic there?

[DSeid]

@AdmiralCrunch

Cite?

Uh no I do not have a bug in the biggees meetings and no they have not as a group announced their bottom line. Still as you point out, they already turned down 30 cents on the dollar, they know Ford debt holders were offered cash of 47 cents on the dollar, they know that Chrysler offered its debt holders more but they are bargaining for 54 cents on the dollar and 40% of the new company, and thanks to the magic of credit default swaps some of the biggest bondholders are better of with GM dead then with a lousy offer. And they know that a prolonged bankruptcy, which is what would result if they do not come to terms, is something that the Feds want to avoid as the Feds believe that the consequences to the supply chain would be horrific bringing down other auto manufacturers and preventing any recovery for many years to come.

I know that Obama is a poker player but if this is bluffing they will call it. And if he isn’t, and there is no other more subtle real plan in the works, then he is making a foolish gamble I think.

[smiling_bandit]

@AdmiralCrunch

Like firing 21,000 employees, shutting down Pontiac, Saab, Hummer, and taking 10 billion in healthcare costs off of their books?

Even the 21000 fir-ees isn’t much for GM, since as I understand their benefits system, those employees are still being paid. Cutting Pontiac is sort of like giving oral antibotics to an AIDS patient. It ain’t enough, and is years to late if it did help. Killing Hummer and Saab is actually rather weird, and is perhaps not the wisest move in the long run.

However, I meant more in the terms of splitting the company and going into outright bakruptcy.

[Magiver]

We’re talking about a company that had a CEOectomy performed by the Federal government. The title of the thread should reflect the desires of the Feds only.

[DWMarch]

Even the 21000 fir-ees isn’t much for GM, since as I understand their benefits system, those employees are still being paid.

I’ve read elsewhere (one of GM’s reports to the government IIRC) that if they go bankrupt, their current collective agreement stays in effect until the bankruptcy negotiations are finished (read: years) and since that collective agreement includes stupid things like paying employees who aren’t even working, I’d say they’d be wise to just let their company go down the toilet rather than take a bunch of concessions that will leave them out in the cold when it does inevitably tank.

[DSeid]

A group of bondholders makes a counteroffer.

The bondholder committee, which represents about 20% of the debt outstanding, said its offer would save taxpayers $10 billion in cash. Under it, GM would issue new stock and give 41% of it to the UAW, 51% to the bondholders and 1% to common equity holders.

The counteroffer seeks to put bondholders on the same plane as the union, which is owed $7 billion less.

The government would not get equity under this scenario because it wouldn’t need to reduce any of GM’s loans. Unsecured bondholders would likely reduce their entire claim on the auto maker under this plan.

The counterproposal could meet stiff resistance from the Obama administration’s automotive task force, as administration officials have said the GM deal as proposed is more than fair, and have told bondholders they would likely see less under bankruptcy. …

… The committee’s rejection of GM’s exchange reflects wide displeasure among the auto maker’s thousands of creditors. Small bondholders on Wednesday gathered in Warren, Mich., to speak out against the debt exchange offer because it would leave them with just cents on the dollar.

While they hold a small share of GM’s debt – around one-fifth – the strong negative reaction from individual bondholders underscores the challenge GM faces in gaining acceptance for its offer.

So the Feds want to get half the company for $7.7 of debt (and still get the other half back in cash eventually) and give the UAW 39% for half of their $20 billion of debt and give them the other half in cash while giving the bondholders a mere 10% share for their larger $27 billion of debt with no cash now or later and they are daring the bondholders to see if bankruptcy gives them more? Are they really prepared for the consequences of a prolonged bankruptcy process?

I doubt the bondholders will get what they are asking for but there is, I bet, going to be some serious sweetening of the offer made pretty quickly.

If a deal eventually gets struck, any predictions of what it will look like?

[smiling_bandit]

Likewise, my understanding of the offer being made is that, unless Geithner somehow manages to force it through (and I can’t even imagine how that could happen without decades of lawsuits during which time the company would fold like a cheap suit), 90% of the bondholders would have to approve it. Since they are effectively getting nothing, they have no reason to. They can expect a far better deal in bankruptcy, unless the judge decides to throw out the law books.

Which is certainly possible: depending on what judge and where, he (or she) might decide to pull in some reelection votes by screwing the “evil rich dude bondholders” in favor of the noble workers and government. But this is unlikely, and even then the bondholders could’t really do any worse. So they might as well go for broke.

The other problem is that butchering bondholders this way would do serious harm to many, many investors, includng a lot of pension plans (corporate bonds are considered pretty reliable and many pensions are invested in blue-chips and bonds). Screw bondholders in this manner, and you might end up needing to pony the dough in taxes to save old people. Meanwhile, the UAW and the Treasury will wind up controlling GM, which is a arrangement highly unlikely to produce good cars or a competitive company, particularly since the adoption of this program will demolish GM’s remaining credit. Nobody, but nobody, would lend it money or even invest in capital: the plan as-is will also dilute existing shareholders on nearly a 100-to-1 basis.

[Sinaijon]

@DSeid

they are daring the bondholders to see if bankruptcy gives them more?

Could be the case. I don’t know the details of GM, but I know a bunch of bond holders (via hedge funds) for Chrysler didn’t want to settle. Some had credit default swaps (insurance) that would get paid if they went bankrupt. Others had investments in competitors that would do quite well if Chrysler went bankrupt.