GM bondholders

In the US Treasury’s own version of Deal or No Deal, the anxious contestant was persuaded to accept a lowball offer as the master of ceremonies raised the prospect of leaving bankruptcy court with far less. A committee of General Motors bondholders representing about one-fifth of the $27bn of outstanding face value had initially rejected the lopsided treatment of their claims compared with those of the United Auto Workers’ health care trust. The last-minute addition of a sweetener in terms of warrants for up to 15 per cent of the restructured company in addition to the 10 per cent they were already offered made it a slightly less bitter pill to swallow. The real reason they said yes though is about risk, reward and preserving GM’s value.

Acquiescing was probably sensible and not only because of the uncertainty of litigation in bankruptcy court. The quicker and less acrimonious the bankruptcy proceedings, the more bondholders’ equity stake may be worth when GM emerges in its less-leveraged, stripped-down form. GM’s unsecured creditors can now unite in savaging those lower down the legal food chain, such as dealers, while leaving current shareholders, who earlier stood to get a few morsels with a 1 per cent stake, absolutely nothing.

Wags who dubbed the Treasury’s creation “Gettelfinger Motors” (after UAW chief Ron Gettelfinger) can start calling it “Government Motors”. Bondholders’ proposal that the Treasury retains its loans rather than converting them to a proposed 50 per cent equity stake was unworkable given the burden these debts would cause for a restructured business. Instead, the unions’ initial stake will “only” be 17.5 per cent while the government gets 72.5 per cent and will provide tens of billions of dollars more in post-bankruptcy financing. The union will also receive debentures, but their warrants for another 2.5 per cent are farther out of the money than bondholders’ warrants. With its unlimited chequebook, the Treasury has once again got its way, for better or worse.

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