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Ugly choice for GM creditors Ugly choice for GM creditors
(about 3 hours later)
By Greg Wood BBC News, New YorkBy Greg Wood BBC News, New York
Dissident bondholders may mount legal challenges in the bankruptcy courtDissident bondholders may mount legal challenges in the bankruptcy court
When investors lend money to a company, they expect to get it back.When investors lend money to a company, they expect to get it back.
But those who lent $27bn to General Motors when they bought its corporate bonds - the IOUs issued by big companies - risk losing the lot.But those who lent $27bn to General Motors when they bought its corporate bonds - the IOUs issued by big companies - risk losing the lot.
Their only alternative is to accept a shareholding in a new company with a very uncertain future. It is an ugly choice.Their only alternative is to accept a shareholding in a new company with a very uncertain future. It is an ugly choice.
The bondholders turned down an earlier deal to swap their $27bn for a 10% stake in General Motors. They thought that was too little for the amount of money they were owed.The bondholders turned down an earlier deal to swap their $27bn for a 10% stake in General Motors. They thought that was too little for the amount of money they were owed.
But the deal was a vital part of GM's plan to reduce its debts and avoid bankruptcy. Without an agreement, bankruptcy became inevitable.But the deal was a vital part of GM's plan to reduce its debts and avoid bankruptcy. Without an agreement, bankruptcy became inevitable.
New offerNew offer
Shortly after that deal collapsed, the US government's motor industry task force, which has been handling all the talks, approached the bondholders with a new offer.Shortly after that deal collapsed, the US government's motor industry task force, which has been handling all the talks, approached the bondholders with a new offer.
It's enough for me to have moved from rejecting the deal and trying our luck in bankruptcy court to the side of recommending the deal GM bondholderIt's enough for me to have moved from rejecting the deal and trying our luck in bankruptcy court to the side of recommending the deal GM bondholder
It wanted to make sure that they would support its bankruptcy plan.It wanted to make sure that they would support its bankruptcy plan.
That plan will split General Motors in two - "Old GM", with all the "bad" assets like defunct car plants - and "New GM", which will own the "good" assets, such as viable factories and brands like Chevrolet and Cadillac.That plan will split General Motors in two - "Old GM", with all the "bad" assets like defunct car plants - and "New GM", which will own the "good" assets, such as viable factories and brands like Chevrolet and Cadillac.
The bondholders were offered up to 25% of "New GM" if they would come on board.The bondholders were offered up to 25% of "New GM" if they would come on board.
After a few hours deliberation, a committee representing a fifth of the bondholders accepted on Saturday. After a few hours deliberation, a committee representing a fifth of the bondholders accepted last week.
And by this weekend a majority of bondholders had decided to support the new offer
"It's enough for me to have moved from rejecting the deal and trying our luck in bankruptcy court to the side of recommending the deal," one leading investor said."It's enough for me to have moved from rejecting the deal and trying our luck in bankruptcy court to the side of recommending the deal," one leading investor said.
WHAT IS A BOND? A bond is simply an IOU issued by a company or a governmentThe bond states when a loan must be repaid and what interest the borrower (issuer) must pay to the holderBanks and investors buy and trade bonds The layman's finance crisis glossaryWHAT IS A BOND? A bond is simply an IOU issued by a company or a governmentThe bond states when a loan must be repaid and what interest the borrower (issuer) must pay to the holderBanks and investors buy and trade bonds The layman's finance crisis glossary
So, what are the bondholders really getting out of this?So, what are the bondholders really getting out of this?
Well, they will only receive their full 25% stake in "New GM" if it achieves a market value of $30bn. In other words, "New GM" has to survive and thrive in a cut throat car market, or at least do well enough to support a strong share price.Well, they will only receive their full 25% stake in "New GM" if it achieves a market value of $30bn. In other words, "New GM" has to survive and thrive in a cut throat car market, or at least do well enough to support a strong share price.
This is sensible.This is sensible.
Bondholders do not want to end up owning extra shares which have little or no value.Bondholders do not want to end up owning extra shares which have little or no value.
But it is a tough challenge for General Motors, and one which goes to the heart of the company's problems - its failure to compete.But it is a tough challenge for General Motors, and one which goes to the heart of the company's problems - its failure to compete.
The $27bn of bondholder debt will stay with "Old GM".The $27bn of bondholder debt will stay with "Old GM".
As senior creditors they may get some money back when unwanted assets, such as shuttered car plants, are eventually sold off to property developers or the like. But it will only be a tiny fraction of what they are owed.As senior creditors they may get some money back when unwanted assets, such as shuttered car plants, are eventually sold off to property developers or the like. But it will only be a tiny fraction of what they are owed.
Disparate bunchDisparate bunch
Will bondholders support the bankruptcy process?Will bondholders support the bankruptcy process?
Most of them have pledged to do so. But they are a disparate bunch, ranging from large hedge funds to "mom-and-pop" investors. Their interests do not necessarily coincide.Most of them have pledged to do so. But they are a disparate bunch, ranging from large hedge funds to "mom-and-pop" investors. Their interests do not necessarily coincide.
It is possible that dissident bondholders will mount legal challenges in the bankruptcy court.It is possible that dissident bondholders will mount legal challenges in the bankruptcy court.
Many of them have bought "credit default swaps" - insurance policies which will pay out if General Motors defaults on its debts.Many of them have bought "credit default swaps" - insurance policies which will pay out if General Motors defaults on its debts.
They may view the certainty of that payout as preferable to the uncertainty of a punt on the future of "New GM".They may view the certainty of that payout as preferable to the uncertainty of a punt on the future of "New GM".
It is a cautionary tale. Investors have been inclined to view corporate bonds as a relatively safe investment.It is a cautionary tale. Investors have been inclined to view corporate bonds as a relatively safe investment.
But companies do go bust - even those with a history as glorious as General Motors.But companies do go bust - even those with a history as glorious as General Motors.