Big Wheels Keep on Rolling…Over Bondholders

"The United Auto Workers have scored another victory under the extremely favorable terms offered on government loans to a bankrupt GM. Meanwhile, bondholders and taxpayers are left holding the bag."

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Big Wheels Keep on Rolling…Over Bondholders
By ANDREW BARY
The United Auto Workers have scored another victory under the extremely favorable terms offered on government loans to a bankrupt GM. Meanwhile, bondholders and taxpayers are left holding the bag.

THE POLITICALLY POWERFUL united Auto Workers emerged with an exceptionally sweet deal in the proposed reorganization of a bankrupt General Motors -- and the taxpayer essentially is footing the bill.

The federal government may be lucky to get back half of the $50 billion owed by GM (ticker: GMGMQ), consisting of nearly $20 billion of existing loans and about $30 billion that Uncle Sam plans to extend through so-called debtor-in-possession financing in bankruptcy. ("Uncle Sam's GM Follies")

The government effectively is making a gift to the UAW, because it is converting about $40 billion of its GM loans that are senior to the UAW claims into a 61% equity stake in the new company, making its recovery highly dependent on the new GM's equity value.

With Wall Street anticipating a $24 billion market value for the retooled GM, the government loans would be valued at about 50 cents on the dollar, after factoring in the $8.8 billion of new GM debt and preferred that Uncle Sam will get. For the government to come out whole, GM's equity value would have to approach $70 billion -- a very unlikely outcome. Ford (F) and BMW (BMW.Germany), arguably stronger companies, each have market values of $20 billion.

The Obama administration's willingness to move from a position as a secured lender to an equity holder in GM will let GM reduce its total debt to $17 billion from more than $50 billion. While financial details are sketchy, GM could emerge from bankruptcy with a strong balance sheet, $20 billion of cash and no net debt, according to a report by JPMorgan auto analyst Himanshu Patel.
As it did in the Chrysler bankruptcy last month, the UAW pulled off a coup, because it probably will emerge with 60 cents to 70 cents on the dollar for its $20 billion claim for post-retirement health care for its members. It will get $9 billion of new debt and preferred stock, plus a 17.5% equity stake.

Another group that does well: banks owed about $6 billion by GM. They are expected to be paid in full from the government's fresh loan of $30 billion to a bankrupt GM. In contrast, Chrysler's bank lenders probably will get just 29 cents on the dollar in a deal orchestrated by the administration.
The biggest losers: the bondholders who own $27 billion of unsecured debt, including many individuals. They are to receive a 10% stake in the new GM, plus warrants to buy an additional 15%.

The new deal, while less punitive than GM's original offer in April, may result in a recovery of little more than 15 cents on the dollar for the bondholders, according to analysis by CreditSights. This suggests little upside potential to the General Motors debt, which was trading at about 12 cents on the dollar last week. Assuming GM has an equity value of $24 billion, bondholders would get $2.4 billion in equity, plus warrants for 15% of GM, worth at least $700 million.
Investors enamored of the auto industry probably would do better with common stock or debt of Ford or shares of strong foreign car makers like Daimler (DAI), BMW, Honda (HMC) and Toyota (TM).

The exchange-traded GM debt, including convertibles (formerly tickers GBM and GPM) with a $25 face value, were suspended from trading on the New York Stock Exchange, and will be delisted, along with GM's shares. These convertibles, and other former NYSE-listed debt, likely will soon start trading over-the-counter.

It is galling to many bondholders that they are getting so little, relative to the UAW, for a similar legal claim, but the Obama administration played favorites, just as it did with Chrysler, and the unions got preference. No matter that much of the proceeds from the $27 billion of debt sold by General Motors went directly into the UAW employee-benefit plans.

In helping to shape General Motors' bankruptcy, the president seems to have played favorites.
"The UAW gets a recovery of five times the bondholders' under reasonably upbeat scenarios." wrote analysts at CreditSights last week. "This is just the fact. Let's see if anyone in Washington or too many media outlets will make the simple statement. The willingness of the Treasury to face the likelihood of eating a major loss down the line to get this deal done in what is still a very UAW-friendly and lopsided deal only partly eases the pain for bondholders."

No wonder the UAW could boast: "For our active members, these tentative changes mean no loss in your hourly base, no reduction in your health care and no reduction in pensions." This is an impressive accomplishment for an organization that faced disaster in a less favorable bankruptcy scenario.

In fact, never has an American union done so well at the expense of shareholders and creditors.