GM bonds tumble on Obama Action (Dow Jones Newswire)

MARCH 30, 2009, 11:21 A.M. ET GM Bonds Tumble, CDS Rise After Government Intervention


By Andrew Edwards
Of DOW JONES NEWSWIRES

NEW YORK (Dow Jones)--General Motors Corp. (GM) bonds fell Monday while the cost of protecting them moved further into extremely distressed territory after the government's sweeping intervention in the troubled auto maker.

The company's 8.375% bonds due 2033 were off 2 points at 16 cents on the dollar, according to online trading platform MarketAxess.

Its shorter-term debt was off more sharply. GM's 7.2% note due 2011 traded down 4.5 points to 22 cents on the dollar, while its 7.125% notes due 2013 traded down 4 points at 18 cents on the dollar. Despite the trade-off, all three bonds are still up so far for the month, according to MarketAxess.

In early trade, GM's credit default swaps traded at 79.5 points from 77 points upfront on Friday, which means that investors must now pay $7.95 million up front plus a $500,000 fee to protect $10 million of GM bonds against default for five years. Similarly, GMAC's credit default swaps were trading at 31 Monday morning from 27.5 on Friday, according to Phoenix Partners Group.

Overnight, the Obama administration's auto team announced the departure of GM Chief Executive Rick Wagoner and suggested that filing for bankruptcy protection may represent the best chance of success for both GM and Chrysler LLC (C.XX).
GM's euro-denominated bonds due 2013 and 2033 were quoted at 15% and 25% of face value, respectively, according to one trading desk, reflecting the low recovery rates bondholders already expect under plans mooted to cut GM's debt.

"GM bonds were already trading relatively close to where people think recovery values will be," said Sven Kreitmair, credit analyst at UniCredit. "When the talk was of a two-thirds debt-for-equity swap, they traded at around 33% of face value. But as each new plan is suggested, the likely recovery rate for bondholders gets lower."
Still, not everyone reckons current bond prices are reflecting what recovery values would be.

KDP Advisor's credit analysts Kip Penniman Jr. has been arguing for some time that GM's bonds could still pay out at around 33 cents on the dollar.

GM's bondholders still have a lot of leverage: The government has said that bankruptcy would be a last resort, and bondholders can force an unmanaged bankruptcy if they're pushed to it, he said.

"They basically have the nuclear option," Penniman said, saying bondholders probably have more leverage in the process than the United Auto Workers.

Yet, a prenegotiated bankruptcy is the most likely outcome since a breach of bondholder contracts by the government would have dire consequences for the legal framework of financial markets, he said.

"Our legal guy here says that would just be a disaster; fallout would go far beyond the auto industry, " Penniman said. "They're going to have to do it in the legal framework, and that's why they will have to work with the bondholders."

The most simple resolution would be to issue government backed debt at 33 cents on the dollar with a government guarantee, with an equity kicker - what Penniman calls a "surgical bankruptcy" - 30 days in and out.

The government is pressuring the bondholders to agree to an equity swap that would reduce GM's debt load by two-thirds.

Meanwhile, the government's billions in bailout loans, which are currently subordinate to bank debt, could be put ahead of other loans through debtor in possession, or DIP, financing, "recapitalizing GM to the point where the taxpayer is where it should be in the first place."

GM and Chrysler received a total of $17.4 billion in government loans in December and have requested more. Of the $21.6 billion sought in new loans, GM is seeking $16.6 billion more, while Chrysler has asked for $5.5 billion.

-By Andrew Edwards, Dow Jones Newswires; 201-938-5973; andrew.edwards@dowjones.com (Mark Brown in London, and Neil King Jr. and John D. Stoll of The Wall Street Journal contributed to this report)