In an article posted on the Financial Times on 5/11/09 the demise of GM is disected and the conclusion is that bankruptcy is all but in the cards. Yes, the prediction of their death has been imminent for weeks now, but the reason is sick and twisted. Yes, the title "GM Bankruptcy a Sure Bet" is intentional. The stakeholders in this sorry tale are the same as in the Chrysler bankruptcy. The Unions making concessions--Check. Management making concessions--Check. The Bondholder making concessions--HOLD ON, not so fast.
Hedge funds and other investors stand to make billions of dollars on credit insurance contracts if GM de-clares bankruptcy, a prospect that is complicating efforts to persuade creditors to agree to a restructuring plan for the carmaker, analysts say.
Henny Sender of the Financial Times writes a short article with little commentary because the words speak for themselves. Our favorite Hedge Funds have decided to not take the sucker bet. They have taken out $34bn in Credit Default Swaps on the $27bn in bonds they hold. Should they take the 10% equity stake in the company in exchange for their bond holdings as the Government asks or refuse and receive a pay out with a net profit of $2.4bn if GM declares bankruptcy? Even if you hate math, the formula is easy to calculate.
Since I am sure they are real Americans, the choice is clear.
The opposition of 10 per cent of bondholders is enough to derail the proposal, which has already triggered protests from investors who argue it unfairly rewards the UAW at the expense of bondholders.
The UAW has agreed to take a 39% equity stake. Well the Healthcare Fund anyway. The actual workers have only the chance to keep their jobs, a slight chance.
The CDS positions mark a crucial difference between GM and Chrysler, which filed for bankruptcy protection as part of what it hopes will be a swift restructuring. Chrysler had $6.9bn in bank loans, on which there were few credit insurance contracts.
We all know what happened to Chrysler when the Hedge Fund Bondholder's were done. The GM Bondholder's are going to double down on their bet.