4.27.2009

Distressed Debt Exchange - GM

I know we have been pounding the topic of Distressed Debt Exchanges into a pulp on this blog.  But there is a reason for that. They are going to be happening with such frequency in the coming years as levered entities try to "solve" their problems with a coercive exchange (one defined as threatening Chapter 11).  The big news this morning is GM's Debt Exchange. You can find it here: GM Debt Exchange.  I just finished reading the exchange offer.  Here is an executive summary of the press release:

  • Commencing exchange for $27B of unsecured notes
  • Exchange is vital to restructuring out of court
  • 225 shares per $1,000 of bond principal.  
  • Cash will be paid out for accrued interest. According to the press release, USD interest accruals range anywhere from $7.5 per $1000 bonds (less than a 1 point) to $43 per $1000 bonds (4.3 points)
  • If GM does not receive enough exchange by June 1, 2009, will file for bankruptcy
  • Exchange expires 11:59PM, Tuesday May 26th
  • Inserting a call option on non-USD notes
  • Consummation is conditioned upon: Treasury approval (they believe they need 90% of principal to tender to get approval), U.S. Treasury issued 50% of pro forma common stock in exchange for cancellation of at least 50% of GM's outstanding treasury debt and cancellation of the Treasury Warrants, evidence that the Treasury will provide an additional $11.6B of funding that GM believe it will need after May 1st, 2009, VEBA modification (discussed more below), U.S. Treasury and VEBA ownership not more than 89% of Pro Forma stock, binding labor modifications.
Note holders will get 10% of the new GM, existing common will get 1%, and the Treasury and VEBA the balance (exact ratio to be determined). The VEBA negotiations call for GM to issue stock instead of cash for at least 50% of their future obligations to the VEBA (the balance paid in cash).

Bonds are currently trading somewhere around 9 bid, 10 offer. Maybe slightly higher for more liquid issues. The Revolver is trading 50.5-52.5, up a few points from Friday's close, and the Term Loan is trading at 61 bid without, up 3 points from Friday's close.  Obviously the secured lender are liking this deal. The stock is also up - I do not know why though. 

This exchange offer is significantly worse for bondholders than the one being discussed a few weeks back where debtholders would get a substantial portion of the equity. According to press releases, the GM break even point for SAAR would be 10M. Of course, the company is saying this, and you can make your own decision if you want to believe what GM is telling you. 

There was other news on GM today (cutting lots of jobs, phasing out Pontiac, speeding up closing of factories, cutting dealerships by 34%). For more details on these read the WSJ piece

Admittedly, I have nothing positive to say about this plan.  GM should of filed years and years ago.  They've spent ~$145B in capex since 1990 ... AND THEY STILL NEED MORE MONEY TO SURVIVE. They are still going to have 40,000 unionized workers. They are still going to need more tax payer money. They are cancelling tax payer debt in exchange for stock. 

As a bondholder, I really do not know what you should do. If they file, the government is going to surely prime you, and your recovery could be less than ten cents on the dollar where the bonds are trading. The exchanged stock though - how much is that really worth?  I'd be a seller of the bonds at these levels.  I don't want the stock, and I do not like the risks that a bankruptcy brings.

This whole situation is a damn shame.

3 comments:

widemoatinvesting 4/27/2009  

Why not long bonds, short common? As you say, the common--owning 1% of new GM--looks very overpriced, implying a value of 100B for the post-restructured GM.

Are there any restrictions on the debt holders who exchange? Can they immediately sell their common?

Anonymous,  4/27/2009  

widemoatinvesting,

I wonder how easy it would be to borrow GM stock right now. I remember reading somewhere that many large brokerages (e.g. Merrill) have been approaching current GM and F shareholders, and offering extremely high fee payments (10% or higher) to be allowed to borrow stock for purposes of shorting, since there are hardly any significant shares out there to borrow.

Anonymous,  4/27/2009  

10% fee is not that high these days. my guess is there is very little borrow (locate) or the fee is 50%+. There may also be restrictive margin requirements to short the stock at a PB.

Email

hunter [at] distressed-debt-investing [dot] com

About Me

I have spent the majority of my career as a value investor. For the past 8 years, I have worked on the buy side as a distressed debt and high yield investor.