GM Bondholder Says Deal Stinks
You keep reading about the GM bondholders holding out, slowing up the works, gumming the wheels of progress. Ninety percent of us must agree by May 26 to a swap deal for GM common stock or else the company files for bankruptcy. Forget bloated union contracts, foreign competition and decades of decline -- it's the bondholders that will drag down GM. Unless we take one for the team.
It's a real hustle down the aisle for a deal that, as a former Miami resident I can say, blows like a hurricane. And though Chapter 11 bankruptcy seems unavoidable, weary bondholders -- it's been a rough ride, people -- are expected to leap in front of each other to swap out our notes for stock shares that may soon be meaningless.
Oh yes, there's also an under-publicized 1-for-100 reverse stock split attached to the offer. And the company rounds down each fractional share while converting your notes. The well-publicized 225 shares for every $1,000 of principal actually ends up being two shares. Two shares, not 225.
Such a deal!
Here's my personal slice of the choices facing GM bondholders. If you see me on the street, feel free to buy me a beer and commiserate over my losses.
In 2006, I inherited GM promissory notes with original principal value of $62,500. Some of them dated back to the 1940s, when my grandfather the banker scraped up the bones to invest in the rising auto company. The market value on the bonds, what I could get for selling them in 2006, was about $40,000.
I had no great impression of GM's prospects and thought about selling. But I drifted along, holding. I didn't know much about bonds and was happy to find that these, at 7.25 percent interest, spat out $1,100 every three months - come rain or shine. Their total market value could drop to $4,000, as it did in 2009, and they still kicked out that $1,100 of taxable income every quarter. If you thought about it in a certain way, you felt funny taking the money considering the company's faltering finances. But you did.
All that's over the minute GM files bankruptcy, possibly as early as next week. The interest payments on bonds stop, the stockholders lose their shares. But there are key differences between bonds and stocks which may still account for the bondholder holdouts.
Traditionally, bondholders are considered to have higher priority than stockholders in a bankruptcy settlement. The bondholders get paid before the stockholders.
So why would GM bondholders, who've held on this long, jump to downgrade their legal position at the last second before the axe hits the turkey's neck? Although most accounts say any reimbursement to current bondholders is far off and faint.
The terms of GM's deal to the bondholders are also appalling, as is the low-radar treatment given to the 1-for-100 reverse stock split.
Last week I received a GM report on the bond-stock swap offer. Its stark, austere graphical treatment caught my eye. I'm used to getting company annual reports which have pictures of a family at Epcot, or a multi-racial team of diligent workers making you money.
The GM bond-swap publication is wrapped in a glossy white cover, with just a spash of royal blue in the GM logo. Printed on the white cover is the CEO's letter to the bondholders. It's a very solemn effect, almost biblical. Like you've died and gone to heaven and are getting the introductory manual.
The language of the chairman's letter is terse, like a field general talking to troops about to be decimated in a lopsided skirmish. If GM doesn't get 90 percent of bondholders on board with the deal by May 26, the company will file for Chapter 11.
That's a lot of pressure! Nobody likes to be the stick-in-the-mud who ruins the day. The greedy one who put his own interests first over the greater good.
Returning to the glossy cover, the much-touted 225 shares for every $1,000 language is bold-faced in the third paragraph of the chairman's letter. The information about the reverse stock split and detrimental rounding down of fractional shares is found in the inner pages.
The thinking is that when a company goes to the extreme position of a 1-for-100 reverse stock split -- taking your 100 shares and making them into one -- the value of the remaining shares will go up because there are now fewer total shares. I've gone through one other 1-for-100 reverse split, and it didn't do much for that company's stock price. It's a pretty desperate maneuver. It's hard to see shares of the new GM stock popping much, even if the company avoids bankruptcy at the government's May 26 deadline for the bond swap.
After substituting real-world math for corporate calculus, my swap would have been to cash in promissory notes worth a former principal of $62,500 and current market value of $4,000 in exchange for 140 shares of GM common stock. It's hard to know what that future, post-swap stock price would be -- but at GM stock's price this morning of $1.19, my holdings in GM's future would be worth $167.
Mazeltov!
Or I could keep the bonds, as I suspect many people are, hoping the government might yet sweeten the deal to move the ball forward. Or settle in to see what the Chapter 11 process brings.
I decided to sell the bonds and put myself out of my misery. I bailed for $4,000 real dollars rather than have to follow GM's bankruptcy litigation for the next five years. I'm out of the game. It's almost a relief, as I'm sure it will be to President Obama to get this mess off the front burner.
I sold my bonds the morning after I read through the glossy GM white book. It felt shabby the way the company was boldfacing 225 shares on the cover -- and the reality of 2 shares tucked away on page 16. That's no way to treat a brother who's been in the family 60, 70 years.
About six years ago, I expressed doubt about GM's future to my dear mother, a smart cookie who ran the family finances. I remember how she lifted her head higher, almost as if she were feeling patriotic, and said with mock outrage "surely not GM!" In her eyes I could see a General Motors that had been the titan of industry, the cock of the walk.
I think a lot of investors see a little bit of the U.S. in GM. The auto industry is such a huge part of the United States' rise to industrial supremacy. And GM is identified with luxury and opulence, the American dream made good. You worked hard and made a good living and bought yourself a Cadillac. The investors' instinct, perhaps, has been to hold on and hope GM would pull through, in the same way we want America to succeed.
It's a shame that this warmth of spirit is getting paid with such a raw deal.
But as they tell you in every investment prospectus: "Past performance is no guarantee of future results."