GM: Chronicle of a Bankruptcy Foretold

Hello, General Motors announced Monday a new plan to avoid bankruptcy and become a profitable company. However, just like Gabriel Garcia Marquez’ book “Chronicle of a Death Foretold” it seems that everyone in town (or Wall Street in this case) know that Santiago Nasar (GM) will not survive.

The reason for this is that GM is offering an extremely bad deal to bondholders that cannot possibly succeed. Why would debt holders exchange when they would get a better recovery value in bankruptcy? GM knows this and could possibly be going forward with this offer just as a political move to be able to blame bankruptcy on a specific group (bondholders in this case). The exchange offer expires May 26th so mark June 1st as the potential filing date. More details below.

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Treasury prices rose on Monday on concerns that the swine flu outbreak could affect the economic recovery (consumers could choose to stay home, affecting aggregate consumer spending). The 5 year note rose 14/32s to yield 1.84% while the 10-year note gained 22/32s yielding 2.91%. The long bond traded 28/32s higher to yield 3.83%. As Treasuries rose, equities fell with both the Dow Jones and Nasdaq losing ground for the day. The only Dow stock registering a sharp gain was General Motors (+21.30%) as the automaker unveiled a new plan to avoid bankruptcy. However, as Brian Cap, Credit Strategist from our group mentioned in one of his daily comments, the exchange offer announced as part of this restructuring plan is not attractive enough to bondholders.

“Our initial impression is that this deal (225 shares) will not be attractive enough to gain bondholder support. Investors should NOT simply multiply the existing share price (GM: ~$2.08) times the number of shares to be received (225) to come up with an estimated recovery value. While there will be value added to GM for the reduction of debt, there will be a significant dilution due to the increase in shares outstanding.” Brian Cap, Credit Strategist Fixed Income Strategies Group.

The offer would give investors 225 shares of GM common stock for each $1000 face value of unsecured debt plus accrued interest. The government has mandated that at least 90% of the $27 billion aggregate notes need to be tendered in the exchange offer which expires May 26 2009.

Today’s economic news presents Tier-2 data with the highlight being the Consumer Confidence Report. Treasuries are trading higher across the yield curve as the S&P Futures shows a weaker opening in equities. The 10-year Treasury note is currently trading 7/32s higher to yield 2.88% while the 30-year bond has gained 14/32s yielding 3.80%. For the record, the Consumer Confidence report will be released at 9:00 am CDT; analysts are expecting consumer sentiment to slightly improve from the previous period from 26.0 to 29.7. Additionally, analysts are also expecting an improvement in the Richmond Fed Index, a regional survey which measures manufacturing activity, to -17 from -20 reported last month. Also, the Treasury will auction $35 billion of a 5-year note today at noon CDT. The issue will de dated and settle April 30th.