As GM Plans Bond Payment Miss, Last Vestiges Of Hope Fade Away
23 April 2009 - 7:15AM
Dow Jones News
Any investors with knowledge of General Motors Corp.'s (GM)
bonds won't be shocked to learn that the company is going to miss a
bond payment - the market has been forecasting a bankruptcy for
months.
The concern is what the words "GM" and "default" together will
do to investors who are not intimately aware that the auto giant's
bonds are trading at less than 10 cents on the dollar.
"People don't understand where these bonds are trading; this is
not new information," said Doug Forsyth, who manages about $3.75
billion in high yield and convertible bonds at Nicholas-Applegate
Capital Management. "From a manager's perspective this is par for
the course, but it makes headlines and spooks some people
away."
To be sure, as Forsyth pointed out, GM is a miniscule part of
the high-yield market now. Most traders have long written the
company off, and articles about a prospective bankruptcy have been
part of the news flow about the company since at least last year
when the company appealed to the federal government for help.
Large GM bondholders were already aware that the company was
planning on missing a big interest payment, according to a person
familiar with the thinking of the ad-hoc committee that holds just
under half of the company's bonds.
The person said they knew the June 1 government deadline for a
restructuring plan wasn't a coincidence; the government didn't want
the struggling company to spend $1 billion to keep servicing its
debt.
Much of the market has long been following that line of
thinking. Portfolio manager Greg Hopper of the Artio Global High
Income Fund said that at this point most of the holders of
auto-related debt are professional distressed investors and know
what they're getting into.
Still many of GM's bonds traded down Wednesday afternoon,
implying there were still some hopefuls out there. The company's $3
billion 8.375% bond offering due 2033 recently changed hands at 9.1
cents on the dollar, according to online trading platform
MarketAxess, down 0.81 cents for the day on 10 trades.
As much as 20% of GM's $28 billion in bonds are held by small
investors who haven't already read the writing on the wall. Many of
them won't have been able to trade out of their bonds and will only
take losses if the company defaults.
"If it does default I think you're going to see a profound
reorientation in Middle America," said Richard Peterson, managing
director of hedge fund MarketPsy Capital LLC. "It's going to have
ripples throughout the investing public."
GM Chief Financial Officer Ray Young - who told reporters that
the auto maker had no plans to meet the June 1 interest payment -
may have done investors a favor by reminding everyone of the harsh
reality ahead.
"People should be getting the sleep out of their eyes and seeing
it's over," said Marilyn Cohen, president of retail bond investment
manager Envision Capital. "I would imagine they're going to file
any minute...Not making a payment - it's going to show them that
this time, they mean it."
Next week will be the one to watch to see how the projected GM
default will play out. GM's Young said the company will launch a
debt-for-equity exchange in coming days - it has to do so by May 1
to avoid a filing. Investors will also be watching how Chrysler's
restructuring deadline will be handled by the government, which is
widely seen as a dry run for GM.
"This is all to get GM, which is the real big fish, lined up and
primed, hopefully to make a bankruptcy filing as clean and
expedient as possible," said Kip Penniman, GM debt analyst at KDP
Advisor.
-By Andrew Edwards, Dow Jones Newswires; 210-938-5973;
andrew.edwards@dowjones.com