GM Bondholders: A View From the Back Seat

Klotz on Bonds

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<h3>James A. Klotz</h3>

James A. Klotz

The highly anticipated General Motors Initial Public Offering opened for trading this week amid fanfare and hoopla worthy of a royal coronation.

GM executives rang the bell on the stock exchange, followed by the ear shattering sound of the revving engine of a new Chevy Camaro.

The IPO raised $15.8 billion, the largest public share offering in financial history. The government’s ownership in the company will be reduced to approximately 33% from its original stake of 61%.

The GM turnaround story has been remarkable considering the company emerged from bankruptcy proceedings only last year and has now strung together three consecutive profitable quarters. Analysts expect GM to have its first full year profit since 2004.

Industry experts believe that the company’s new debt structure, amended union contracts and upgraded product line will enable GM to continue to compete favorably with both foreign and domestic automakers.

The bondholder’s scenario

Curiously, unmentioned amid the overwhelming publicity surrounding the stock offering were the original unsecured GM bondholders. Our effort to explain their position follows:

According to the trustee, the bondholders who technically own all the assets of the old GM Corp. (Motors Liquidation Company) will receive 10% equity in the new GM along with warrants for an additional 15%.

The timing of this distribution of equity to unsecured bondholders is subject to the bankruptcy court process and will occur after a reorganization plan is submitted, accepted and implemented. It cannot be determined how long this will take, but three to six months seems to be a reasonable estimate.

Some bondholders have expressed disappointment in being unable to participate in the new stock offering, annoyed at being forced to wait for the conversion to stock and warrants.

We believe this will prove to be irrelevant as the bonds are now changing hands at prices that will reflect and track the movement of the stock, anticipating the eventual conversion.

On the morning the IPO was released to trade, the GM benchmark 8 3/8% bonds were trading at 34 to 35 cents on the dollar, a far cry from May of 2009, when they hit bottom at approximately 1.5 cents.

So, for the first time since GM began to stumble toward oblivion, bondholders have a reason to be optimistic.

Auto experts are impressed with GM’s new product line and their electric car, the “Volt,” was recently named green car of the year.

Wouldn’t it be wonderful to have the beleaguered GM bondholders end up with a “happily ever after” ending?

James A. Klotz

President

James A. Klotz is the President of FMSbonds, Inc.
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Nov 18, 2010

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