By: Mark Melnick
General Motors Bondholders: Americas Jagged Little Pill
When people think of bondholders in general, people think of big wealthy tycoons taking a hefty-sized safe bet versus huge corporations. This however is not the case of the approximately 100,000 “mom and pop” holders of General Motor bonds. These people weren’t wealthy at all, even before the collapse of General Motors. When you buy a stock, you own a piece of the company you purchased. When the company does well, your stock will generally rise with improved prospects. In the results of a bankruptcy, your common stock is often worthless and the bondholders become the equity holders of a newly formed company. With it being approximately one year since “the” market bottom and a year since the Big Three automakers approached Congress for a bailout, I thought now would be the right time to review the status of GM bonds.
So What Exactly Is Yet To Come For Holders of GM Bonds:
As a person who went all in with my own money, as well as my investors’ money on GM Bonds, I decided to go through a lot of my old emails and gather a bunch of questions that my investors asked me regarding these bonds. I’m hoping to shed some light on this complex bankruptcy from the bond investors perspective by sharing these questions and answers that I myself had thought about in contemplating an investment in General Motors bonds.
1) What are you supposed to receive as a bondholder?
The $27 Billion in Bonds will be converted into 3 things:
a) 10% of the new GM common stock.
b) 7.5% of the new company in warrants that value the new GM at a $15 Billion Market Cap.
c) 7.5% of the new company in warrants that value the new GM at a $30 Billion Market Cap.
a) 10% of the new GM common stock.
b) 7.5% of the new company in warrants that value the new GM at a $15 Billion Market Cap.
c) 7.5% of the new company in warrants that value the new GM at a $30 Billion Market Cap.
This is a good approximation, but it is not exact for the following reasons:
d) Motors Liquidation Corp still has pending lawsuits that were not yet settled.
e) There are assets of the old GM that are NOT being transferred to the new GM that may add value to the bondholders of the Old GM.
2) If the government gets paid back, will the GM Bonds come back to life and start paying their coupon?
No, the GM Bonds are bonds of the old General Motors(Motor Liquidation Corp MTLQQ.PK) and will NOT be transferred over as debt into the future new General Motors. The coupon on these bonds are theoretically dead, and will NEVER be paid again for they will be converted into shares AND warrants of the future new company. $50 Billion of the government loans will NOT require the New GM to be paid back, for the government will take a majority stake in the new company. All other loans will be needed to be paid back however.
3) Why are the GM retail bonds halted to this day while the GM institutional bonds have been trading?
Even though the retail GM Bonds are not trading ($25 par value), the institutional GM Bonds($1000 par value) still are. Even though these bonds are identical in every way(40 retail Bonds = 1 Institutional Bond), it is still unclear why the retail bonds got halted, while the institutional bonds have not. I can not get an answer from ANYONE regarding why the divergence in treatment.
The only people who have answers that I can find are the people at Wilmington Trust(WL). Wilmington Trust is successor indenture trustee for certain unsecured debt securities issued by General Motors Corporation. If you have questions about these securities,try calling (866) 521-0079 Monday through Friday from 8:00 a.m. to 5:30 p.m. (Eastern). If you are calling from outside the United States, call (302) 636-4130. I have had a nice 6 week stretch being “ping-ponged” calling that number until I finally landed their CEO Ted T. Cecala. After a 40-45 minute conversation, I concluded that Ted was a nice guy, but let me tell you, he didn’t answer 90% of my questions. I feel I get a good read on people, and I believe with 110% certainty that he had a lot of answers that he wasn’t willing to give out. It would not surprise me if someone told him what he was allowed and not allowed to talk about.
4) When will the new General Motors IPO?
Ahh the million dollar question 🙂 While no one knows the answer to this question, I have a good idea. General Motors has been used as a political tool since its bankruptcy filing. For this reason I believe it will continue to be a political tool.
While most of you are wondering when this new GM will IPO, I think the same question is in the minds of the Obama Administration. The worst thing for Obama, and possibly the Democrats in general would be if this new GM IPO’d and didn’t return enough money to the bondholders.
Hypothetical Scenario #1: The new GM IPO is a failure.
a) The Republicans would use this as a weapon against the Democrats, insinuating how the Obama Administration’s interference has resulted in a poor outcome for GM.
b) This would look bad on behalf of the Democrats.
Hypothetical Scenario #2: The new GM IPO is a success
c) The Democrats would back Obama’s intervention with General Motors to show how he is the man with the “Red Cape” that swooped down and saved a company that is part of America’s Great History from failing and crumbling.
d) This would look good on behalf of the Democrats.
Think about what steps the Obama Administration has taken in the meanwhile to help boost this new GM before it IPOs.
e) Cash for Clunkers- Hand over your car, buy a new one with a well-sized discount! My Translation: Here is some money for free Mr. American car companies.
f) Toyota’s Woes- Faulty Accelerators that cause the car to inexplicably accelerate killing a total of 52 Americans in the U.S. My Translation: We knew about this problem for years, what a “big coincidence” that we bring it up now to help boost American car companies like Ford and GM.
So to me, it appears the government is taking a multitude of approaches to help boost General Motors up before it IPOs.
I believe GM will IPO in August 2010, right before the September elections so it may be used as a political tool.
5) I am a holder of GM’s retail bonds, how can I get an assessment of their fair value since they are halted?
The FINRA website has the institutional bonds trading at an average price of 32-33 cents on the dollar. Currently, these institutional bonds are the ONLY way in which you can own shares and warrants of the new GM right before it IPOs, due to the fact that the retail bonds (such as BGM, GRM, GMW, etc) are halted across the board and you needed to own these retail bonds before they were halted on June 1st of last year. You no longer have to pay accrued interest on these bonds if you wish to buy them since the coupon is no longer being paid (Thanks Milton).
So ultimately I am very bullish on these bonds. I feel their current prices on the FINRA website have negativity priced into them. What is that negativity? The negativity is the uncertainty that no one knows when the new GM will IPO. Once a date for the IPO is given, I’m expecting these bonds to take a big leg up in price for people will know when it is opening. Again this will be the only way that people can get their hands on the new stock and warrants right before it IPOs. It will be very interesting to see this thing pan out.
As my first blog post, and for future blog posts, I will ALWAYS disclose my interests in the topics I am discussing (pretty much what I do on the T3Live.com Virtual Trading Floor with my trades, feel free to tune in). I hope you enjoyed my assessment and thoughts on General Motors.
Disclaimer: Between myself and my clients, we are holding General Motor Bonds, with over 90% being retail bonds.
Sentiment: Strong Buy
