BK Alert - GM Bond Holders Continue To Resist Discount
General Motors bond holders are continuing to resists restructuring efforts that are required to keep the company out of bankruptcy. Things are looking perilous with the March 31, 2009 deadline approaching.
The great stare down that is the insolvent General Motors situation is coming to a head. The bond holders in the company are being asked to cut their positions from 27.5 billion owned to 9.2 billion and stock. The bond holders obviously are not keen on taking such a huge loss. At this point, they are refusing to do so and essentially daring the government to let the company go bankrupt.
So, why doesn’t the Obama Administration just let GM fall into bankruptcy? Well, there are a number of reasons. Most are political. Allowing GM to fall into bankruptcy will create a scenario where a judge can come in and slash the union contracts for auto workers. The unions have obviously been big supporters of the Democrat politicians. Furthermore, the election for President is usually decided in the Great Lakes region, which makes Michigan and Ohio very important. In short, politics are definitely a big deal.
A secondary issue to consider is the fact that a bankruptcy filing doesn’t let the government off the hook. GM is still going to need money to keep up and running. In fact, it may need more since most people are not going to be keen on buying a car from a bankruptcy company. As a result, there is no real advantage to letting GM fall into bankruptcy.
The government is not the only entity under pressure her. The bond holders are playing a game of chicken, but it is one they can’t afford to lose. If GM goes into bankruptcy, there is a very good likelihood the company will be liquidated. If that occurs, the bond holders will receive next to nothing for the 27.5 billion investment. That is a huge loss to take. Fidelity Investments is one of the big bond holders and there is serious doubt about how much of a loss it could handle in this regard.
So, what will the final result be? It is hard to say. Logic suggests a middle ground will be found, but these are not logical times. Make sure to keep an eye on this ultimate stare down as it plays out!