GM Debt Holders Likely To Get Lemon
December 4, 2008
I drove a Pontiac Fiero in the late 1980s. I was VERY young and didn’t do much research on the products I bought, not that chatter about engine fires would have deterred me. That car was sweet. And red. And while it never caught fire, they did recall it once or twice. Eventually, I traded it for a Toyota pick-up—more reliable, still red.
General Motors Corp. debt holders will likely be offered an exchange themselves soon, though not one they’ll consider an upgrade. If Congress agrees to a $34 billion rescue package for The Big Three—and as much as lawmakers like to strut and squawk in a show of opposition to such things, it probably will—part of GM’s restructuring plan is to reduce its debt burden by more than half.
In the pages of its plan, which it submitted to Congress, GM said it “will immediately engage current lenders, bondholders and its unions to satisfactorily negotiate the changes necessary to achieve [its sought after] capital structure. Oversight board involvement may be necessary to be successful.”
Hmmm. That last part doesn’t sound good. Apparently, Standard & Poor’s doesn’t think so either. The rating agency on Thursday lowered its corporate credit rating on GM to CC from CCC+ and lowered the ratings on the company’s senior secured and senior unsecured debt.
“We believe the most likely scenario is that GM will offer to exchange some or all of its outstanding debt for equity or new debt at a steep discount to face value,” S&P analyst Robert Schulz said. “Given GM’s weakening liquidity position, we consider such an offer to be a distressed exchange and, as such, it is tantamount to a default.”
S&P’s analysis of the situation can be described as gloomy at best. Even if government support allows GM to avoid a bankruptcy filing, the company’s corporate credit rating won’t likely rise out of the triple-C category after its restructuring. This is because S&P, along with everybody else, expects the global economic crisis to continue for another year or more. Or at least it doesn’t expect a lot of folks to run out and buy cars anytime soon.
So where does that leave GM debt holders? Basically screwed. Soon the federal government will choose between a restructuring plan with a lousy debt exchange, or Chapter 11—which, especially for unsecured bondholders, could be even worse.
Sort of like choosing between an AMC Pacer and an AMC Gremlin. And even though American Motor Corporation was bought by Chrysler not GM, I think you get my drift.
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