The Chrysler cramdown and the GM offer to bondholders have had some unintended consequences:
NEW YORK (Reuters) – Scores of companies are being punished in the bond market as the Obama administration’s policies on General Motors and Chrysler LLC create new risks for creditors, a veteran bond strategist says.
As GM teeters toward a bankruptcy filing and Chrysler attempts to restructure in bankruptcy court, the Obama administration is offering most of the recovery value of those companies to “a favored political class, in this case the United Auto Workers, leaving creditors with very slender debt recoveries,” Christopher Garman, founder of Garman Research in Orinda, California, said in a report released late on Friday.
President Barack Obama and a more tightly Democratic-controlled Congress were sworn in January.
To gauge whether those cases have made debtholders wary of other companies with so-called favored political classes, Garman compared spreads, or bonds’ extra yields over U.S. Treasury yields, for companies with collective bargaining agreements with the high-yield bond market as a whole.
While the two performed in line with each other since 2003, they diverged sharply in February, with spreads on companies with organized labor gapping nearly 11 percentage points higher than the market as a whole, according to Garman’s research.
The gap in spreads has persisted and was about 9 percentage points as of mid-May, Garman said. The gap appeared shortly after strategists reported signs that bondholder negotiations with GM were unraveling.
I warned about this when the terms of the Chrysler deal were announced:
This case is about much more than what happens to Chrysler. It’s about whether the government will enforce and abide by contracts. When these investors bought this debt, they believed that they had first claim on the assets of Chrysler. Now, the Obama administration has arbitrarily altered the position of the creditors to manipulate an outcome that favors junior creditors who happen to have more political muscle than the secured creditors. It is a lesson that every investor should take to heart; in the Obama administration it is political influence that matters the most. President Obama doesn’t stand with the people who have the law on their side. He stands with the people he believes are most deserving regardless of the law. That is a dangerous precedent to set.
Hopefull, the Obama administration is learning. The terms offered to GM bondholders has been improved (via the WSJ):
Under the U.S. restructuring proposal, the Treasury Department would lend GM at least $50 billion to fund the company through bankruptcy proceedings and finance the entity that emerges from Chapter 11. The government would be repaid through equity in the new GM
Administration officials said it could be six to 18 months before GM becomes a publicly traded company again.
The United Auto Workers union would receive 17.5% to fund a retiree health-care trust, and 10% would go to creditors — in line with the offer they rejected Tuesday — though warrants could substantially increase that amount.
Bondholders, who soundly rejected an offer to swap $27.2 billion in debt for 10% equity in the new company, would have rights to buy an additional 15% of GM’s stock at a lower price.
“The Ad Hoc Committee of GM bondholders supports the revised offer from GM and believes that when contrasted with the alternative – uncertain and costly bankruptcy court litigation – that it represents the best alternative for bondholders in the current difficult and dire situation,” the committee said.
The bondholders will take this deal because there isn’t a better one coming, but the whole GM affair is rotten to the core. Taxpayers will have forked over close to $100 billion by the time this is done and we’ll own a lousy car company that still won’t be able to compete with the import brands. Toyota and Honda will still be able to undercut GM and Chrysler prices while producing better cars. And we will weaken the only US based auto company that didn’t need bailing out. Ford will face stiffer competition from a government subsidized GM and GMAC. Maybe we should have just had a bonfire with the $100 billion. At least we could have toasted some marshmallows.