Fisher Investments Editorial Staff
Media Hype/Myths, US Economy

Out With a Thud

By, 05/28/2009

Story Highlights:

  • Bondholders rejected GM's offer to exchange their $27 billion in GM bonds for a 10% stake in the restructured company.
  • The bondholder rejection pushes GM closer to filing for bankruptcy. GM's board of directors will meet later this week to decide the company's next move.
  • Expect GM to file for bankruptcy—and expect heavy government involvement and a relatively quick process similar to Chrysler's proceedings.
  • GM's bankruptcy and nationalization will be bad for the US auto industry, but not necessarily bad for the market. The market has had plenty of time to price in the bankruptcy conclusion.

(Editor's Note: MarketMinder does NOT recommend individual securities; the below is simply an example of a broader theme we wish to highlight.)

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Did you hear that "thud" on Wednesday? It was the sound of General Motors' bondholders pounding the last nail into GM's coffin. GM has until June 1st to meet certain government requirements—including cutting debt, trimming labor costs, and closing dealerships—to qualify for more bailout loans and avoid bankruptcy. A huge contingency to meeting the debt requirements was getting GM bondholders to agree to a debt-for-equity swap offer that expired midnight Tuesday. But as it turns out, GM bondholders would rather let GM bite the dust than bite the bullet themselves.

Bondholders rejected GM's offer to exchange their $27 billion in GM bonds for a 10% stake in the restructured company. GM needed at least 90% of bondholders to agree to the offer in order to meet government debt-cutting requirements. But the 10% stake would have left bondholders with cents on the dollar of what they're owed, so it's no surprise most left the offer cold on the table. Even with extra retiree health care concessions to cut owed debt, it's unlikely GM will meet the government's $44 billion debt reduction target by next Monday.

GM's board of directors will meet later this week to decide the company's next move—likely filing for bankruptcy protection. The Obama administration is already drafting a bankruptcy restructuring proposal for the automaker, which will give the US government a majority stake. GM's coffin has been a long time in the making, and it's no surprise to us we'd arrive here one day.

GM's bankruptcy proceedings will be different from normal filings—expect heavy government involvement and a relatively quick process. Already, Chrysler's bankruptcy proceedings have moved faster and been less disruptive than widely anticipated. Pending a judge's approval of selling Chrysler's assets to a new entity led by Fiat, Chrysler's bankruptcy will be the biggest and fastest bankruptcy proceeding of its kind. The same is likely in store for GM. Arguments GM is a more complex entity than Chrysler miss the point that when the government has a will, there's a way.

GM's bankruptcy and nationalization will be bad for the US auto industry, but will likely not impact the market much. (Note: US and world stocks have moved nicely higher the last month all while Chrysler's wrangled with bankruptcy.) The auto industry will face some disruptions from GM's failure, but fears over labor force and supply chain impact are likely overblown. The company will be restructured—not liquidated—and its viable assets (including the Cadillac and Chevrolet brands) will likely be spun off into a new company.

A GM bankruptcy was pretty much inevitable in our view, and the market has had plenty of time to come to the same conclusion. Long-term GM bonds are already trading pennies on the dollar and have been for a while in anticipation of this outcome. It's been a long and painful journey for GM, and the inevitable destination from this vantage point doesn't look brighter, but reorganization through Chapter 11 bankruptcy is GM's best bet for a brighter and functional future. Remember, where one door closes with a "thud," a window of opportunity elsewhere is opened.

*The content contained in this article represents only the opinions and viewpoints of the Fisher Investments editorial staff.

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*The content contained in this article represents only the opinions and viewpoints of the Fisher Investments editorial staff.

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