Auto Loan Debate: Will The Real Bond Holders Please Stand Up

Posted by: David Kiley on February 18, 2009

Will the real bondholders please stand up?

There are two players at the negotiating table with General Motors, Chrysler and the White House who have a lot of chips to play with in the next six weeks—the United Auto Workers and bond holders.

We know who the union is. But we have far fewer specifics about the bond holders because they are private investors. During the Congressional hearings with the automakers last November and December, Senator Bob Corker said the vast majority were mutual funds and private equity investors who purchased GM debt at between 15 cents and 25 cents on the dollar.

Big-time pension funds, for example, wouldn’t be holding the debt because the debt is too risky. And had they bought the debt when it was issued, they would have had by-law triggers that would forced them to sell it long before the trading price sunk to 15 cents on the dollar.

But Glen Reynolds, CEO and founder of CreditSights research in New York recently told Reuters that the bond holders ARE mostly pension funds, mutual funds, insurance policy holders, retirement savings plans and “other investors.” Wall Street and so-called vulture investors, he said, make up a distinct minority.

There seems to be a difference of opinion about just who these bond holders are. A private equity investor I spoke with this week said he would be very surprised if most of the holders at this point weren’t “vulture funds” who scoop up debt at low prices with the intention and strategy of making a nuisance of themselves to the issuer.

Reynolds says: “The bondholders have to be very guarded about being used as the swing factor in the restructuring…It has to be equal with the UAW’s contributions. The bondholders need to make sure they get an ‘equity play’ in the exchange that will require a significant UAW contribution on the balance sheet and cost front, he said.

I’m a bit baffled over why the UAW is supposed to make a sacrifice proportional to the bond holders to keep GM out of Chapter 11. After all, whoever is holding GM unsecured debt falls into one of two categories—vultures or investors too stupid to not have sold the debt a long time ago. When they bought GM’s debt, they took a risk, not unlike if they had bought GM’s stock. Ditto those investors holding Ford’s unsecured debt.

Unlike the ratings for mortgage-backed securities, ratings agencies have been solid on downgrading GM and Ford debt along the way the last few years. These investors knew exactly what they were getting into. They have PHDs, after all, examining their risk when they invest.

The UAW, by contrast, are workers. They go to factories each day to screw and weld together the vehicles and engines they are directed to build. They didn’t design them, and they are not responsible for marketing them. These are generally folks with high school educations or less, who have been doggedly helping, and succeeding, to narrow the quality and productivity gap with Asian rivals to almost insignificant levels. They are people who take some level of risk by buying houses near plants they hope will continue to operate. But is that the same risk as bond holders?

No question that the UAW and retirees shsould be prepared to pay higher healthcare premiums. The lack of national healthcare in the U.S. is the failure of lawmakers. But it’s the busted system we have to live with, and it is the biggest factor killing American industrial competitiveness.

But it seems a reach to me to demand that bond holders and the union should be expected to negotiate in lockstep with the automakers in terms of making sacrifices.

I suppose the debt holders think they nay get the 30 cents on the dollar being suggested if GM is in bankruptcy court. So, they have little to lose by holding out for more. But I wouldn’t count on it. Unsecured debt holders will likely be screwed in bankruptcy court.

No, they are betting that the Obama Administration will do anything to keep these companies from going into bankruptcy court. That’s the game being played.

The union, meantime, represented by an army of lawyers and Wall Street advisors, is trying to keep from being played for chumps by sacrificing hard-won healthcare benefits, while bond holders who paid 20 cents on the dollar get a windfall of being paid off more than 30 cents.

These are not equal constituencies. But they are in the same poker game.

Reader Comments

Paul (Vw)

February 18, 2009 9:24 AM

>>> The UAW, by contrast, are workers.

True, but they were getting more than the market value...were US factory workers for foreign automakers getting the same kind of compensation? If not, then at some point there has to be a correction, as painful as it may be for everyone.

The UAW had a chance to negotiate late last year, but they (characteristically) resorted to brinkmanship and a weak outgoing president to relinquish and release TARP money. That's a bad public relations move...regardless of how hard won.

"being played for chumps"?

Sadly, I think in the end the taxpayer will have been the biggest chump in this debacle.

Balllbuster

February 19, 2009 4:45 AM

Union labor contracts are executory contract which can be modified during Chapter 11 bankruptcy. Executory contracts are not secured debts. If the UAW play "hardball" with GM's Chapter 11, the bankruptcy court can even jetson the executory contract. Bond holders for most practical purposes are secured lenders. Stockholders are equity or stake holders who will get wipe out during Chapter 11 along with the unsecured creditors. Given GM's multi-billion dollars debt, the equity holders and unsecured creditors will be left holding the bag while the priority secured creditors are given the chance to fight over the leftovers after paying out the administrative expenses. BW Kiley is correct when he writes that UAW workers and bond holders are not "equal constituencies." But nobody in his right mind would claim they were. Regurgitating the GM propaganda that "lack of a national health care" as the primary cause of the demise of the Big3, Kiley ignores the fact that had GM recaptured just 40% of the domestic market share there would not be worker-benefit issues or a bankruptcy threat. Next, Kiley tries to appeal to BW reader's sympathy for the "folks with high school education or less." Kiley needs to stop his pathetic violin serenade. UAW workers are proud, educated and skilled workers who do more than just "screw and weld together the vehicles and engines" as Kiley would have you believe. UAW and its workers deserve respect and admiration for organizing the pool of talent in support of America's industrial base. They don't need anyone's condescending editorials. UAW workers have done nothing wrong to deserve the incompetent management at GM as exhibited by the three Clowns, Wagoner, Lutz, and Wellburn and certain don't need Kiley's patronizing nonsense.

Brian

February 19, 2009 9:22 AM

Lest we forget, these bonds were issued in large part to help finance GM's OPEB obligations to the UAW rank-and-file. Much if not all of that money the bonds raised has been spent. Then the Big Three entered into a new agreement with UAW to fund a multi-billion dollar health care trust.

Perhaps seen in that light, seeking some parity between a tender offer to bondholders and the settlement with the UAW health care trust makes more sense.

aacarguy

February 19, 2009 7:31 PM

The UAW was responsible for the greatest transfer of wealth in history from lenders (bondholders) to workers. Most of the bond debt was created to fund the UAW pensions. The UAW (U Aren't Working) needs to realize they have no right to have seniority over the bondholders.
I also doubt the claim about workers "going to factories every day", perhaps 60-70% of the time

Alex

February 20, 2009 6:20 AM

I am a private investor who paid 100 cents on the dollar for GM bonds in 2004. I don't see a reason why I should accept to lose 70% of my hard earned money. Either I get back 100% or I get back 0%, which is not much more than the 30%. That's the way I think about the situation. Bondholders who paid less than 30% on the dollar should only get back the money they paid.

R Sears

February 20, 2009 7:19 AM

Six years ago, I retired and I loaded up on GM corporate bonds as a ultra conservative measure. The ratings were very good and I figured that I would distance myself as far from the casinos of wall street as possible. Little did I know that I had pulled up to the $100 slot machine. Yes, GM did not take the 20-30 year old hint that they needed to do something to come close to their Japanese rivals. BUT...additionally, here is my short list of who else to blame, pretty much in the order of who to blame most:
1. Greed (At any expense)
2. Federal government- content to let the capitalistic system run wild, never attempting to even look over their shoulder.
3. All the financials and politicians - I guess they figured, nothing wrong here everyone is making money...life is good.
4. OPEC- Had a weapon more powerful than all the nukes. Ruin the capitalistic world by running up oil prices.( Seems likely that manipulating oil prices and destroying the "free world" is going to blow up in their faces and will be their last hurrah).

R Sears

February 20, 2009 7:40 AM

SOLUTION? A REALLY big,big stimulus and the government is out a tiny fraction of what they (have done and plan to do...with taxpayer money)...Ready for this one? With one stroke of a pen, permit a one time (say $10,000) tax free, penalty free withdrawl from our IRA's and 401K's, etc. A gazillion dollars hitting the market all at once..people immediately start buying cars, homes(that they can really afford), food, drugs, medical attention, etc. the list is endless and would help every single sector of not just the US economy but the affects would be the shot heard around the world...and the politicians even look like superheros! Our IRA money (kinda like monopoly money) just sitting there for fun...let us use it NOW!

eric miller

February 20, 2009 4:31 PM

Seems as if the stimulus wont do anything and now gm and saab are out... wow, at least chrysler is hosting some pretty good new car deals...
found them at : http://www.realityautos.com

Fred Flintstone

February 22, 2009 9:49 AM

The bondholders are playing this card, well, because they can. It is nonsense to whine that the bondholder's have PhD's advising them but the poor auto workers are just high-school graduates.

You think the UAW is so poorly run that they don't hire the best advisers money can buy? It is one of the most powerful unions in the country for a reason, and they know precisely what they are doing. The UAW has made brinksmanship into a fine art, and now the bondholders are doing it to them for a change. If the vultures really did buy this debt for 15 cents on the dollar, bankruptcy may not be such a bad deal for them. Vulture investors have a strong stomach and deep pockets, this is not a group anybody should play chicken with.

John Teegen

February 22, 2009 3:56 PM

I am retired and a large potion of my income comes from my IRA distribution (manditory at my age) and a big part of that IRA is my GM bonds. I paid 100 cents on the dollar for my bonds.

Do you mean to tell me that because of government mismanagement that has caused this massive recession and created a vacumn in the sales of all automobiles, I should lose my retirement income.

The only way that may be fair would be to exchange the bond value for GM products dollar for dollar. Then I would have something to drive to the welfare office in to collect what ever is left.

Anthony

February 23, 2009 12:45 PM

If the government is bent on following a policy of making investors whole as in the banks I suggest the Bond holders be allowed to be made whole on the basis up to their cost effective for those holding bonds on the date of the next bailout hearing.This would eliminated speculative profits and minimize the cost to the government since "only speculators are still in these bonds".
Furthermore,when am I going to hear about an increase in the annual allowable Capital gains loss of $1500 per person. At that rate and at age 65+ there isn't much chance in getting anything out of the savings I did for retirement.

Steve Wall

February 23, 2009 6:44 PM

I am another investor who bought these bonds at 102 in 2005. Yes I have watched the ratings fall but I was not in it as an equity investment but as a retirement investment. I need to interest income to live off of and 8% was attractive. My guess is that there a lot more people who are in the same situation. Settlement should be commisurate with what we paid for the bond!

Paolo Dogliani Italy

February 25, 2009 10:25 AM

Yes, I am a too stupid private investor, I bought hundreds of thousands GM bonds a few years ago at a price around 90 cents, when I retired, attracted by the good interest.
I always considered GM as a company too big to go bankrupt, and I cannot foresee that I was going to pay for this economic disaster born and grown in U.S.
At the end those speculators that bought bonds at the minimum will earn money and the poor and honest normal
people who invest on GM bonds savings of a life will loose.
Thank you America, how do you think people outside U.S will trust you again.

From Kiley: What were those bonds rate when you bought them?

Paolo Dogliani

February 26, 2009 3:55 AM

To Kiley:What were Lheman Brothers rating a few months before bankrupt?

From Kiley: I don't know. But I do know that GM's bond ratings have been a long slide, offering bond buyers plenty of time to sell them.

Larry

March 5, 2009 12:27 AM

Alex is correct. What bond holders get back should be based on what they paid. I bought in 2000 @ 100. It was for fixed income. I am retired...I trusted my broker and most of all GM. Kiley's comments do not apply to everyone who bought GM bonds.

julio havier

March 6, 2009 5:58 PM

Were politics not erasing our collective Federal body's common sense, all would agree that massive borrowing/spending and investing IS the solution in a deep recession/depression. Had FDR spent in 1932 like he did in 1941-44, we would not have had depression. Regarding cars, the government should order 10,000 hybrids and give them to municipalities. It would make up the purchase price in fuel savings and create jobs, excellent multiplier effect, and in environmentally savy to boot.

Frank

April 13, 2009 11:48 PM

Ever since conservatives decided loayalty to them was more important than loyalty to our country, our nation has been in delcine.

Not unlike political conservative, corporate executives allowed their ego's and greed to fool them into thinking they could control the worlds economy, while never even thinking that it would be the world who conquered them.

Americans who think that our nation, our workers, and our wages should be pulled down to the worlds level, are simple idiots.

The world economy is nothing more than a black hole to mediocrity, and will lead our nation not into socialism, but into abject irrelevance.

We need to wake up, demand that our nations vital industries survive, reject calls to further damage our economic base by accepting third world wages, and reject the failed ego trip conservatives and ceo's embarked on since Ronald Reagan

We still have people who are more determined to refight the civil war than they are cognicent that we are deeply involved in an economic war.

Unless we repudiate the "world economy", and rededicate our selves to America, we are destined to fail.

These bond holders are nothing more than another group of robber barons, very likely backed by the very nations working to destroy us, and this is simply another tactice to divide and conquer our nation.

Bond holders get 100% of the debt, and 100% of the failed pieces, America gets a new, viable and vibrant GM and we send a message to the world that we will not become the helpless once super power they believe they can make us.

GM lender

April 29, 2009 4:47 AM

Please consider the following:

1) The after-market price is irrelevant. GM is a listed company and bond-debt is their debt. If they are unable to service their debt, they must liquidate. This is all bond-holders are asking.

2)Bond-money in GM is other people's money - money earned BY WORKING. Why is this money suddenly "greedy money"? This money earned by working is invested into GM, which GM used mainly to overpay UAW. This is not the bond-holder's fault.

3) The after-market is there so that bond-investors have flexibility during the term of the debt. Stupid enough not to sell? The original author seems to forget that there is no MAGICAL MARKET where you can sell your bonds. You always sell to OTHER INVESTORS. Bond-holders as a community lose their money regardless of how many times bonds are traded back and forth.

4) Federal Government is a creditor.
Bond-holders are creditors.
Therefore, new equity should be distributed in relation to debt held. Is government being the vulture here asking more of new equity than they are due?

Don't forget - bond-holders did not ask government to step in. Bond-holders would have been happy to accept their risk and let GM fall to Chapter 11 (better still - Chapter 7).

We bond-holders are only asking that US banktruptcy code is being honoured.

In their latest, vulgar proposition GM suggests that current equity holders get 1 % of new GM equity. Why? They are the owners of present GM. They are the ones with the voting right. Their company has failed.

GM owned by UAW? Would it survive for more than two months?

GM lender

April 29, 2009 4:47 AM

Please consider the following:

1) The after-market price is irrelevant. GM is a listed company and bond-debt is their debt. If they are unable to service their debt, they must liquidate. This is all bond-holders are asking.

2)Bond-money in GM is other people's money - money earned BY WORKING. Why is this money suddenly "greedy money"? This money earned by working is invested into GM, which GM used mainly to overpay UAW. This is not the bond-holder's fault.

3) The after-market is there so that bond-investors have flexibility during the term of the debt. Stupid enough not to sell? The original author seems to forget that there is no MAGICAL MARKET where you can sell your bonds. You always sell to OTHER INVESTORS. Bond-holders as a community lose their money regardless of how many times bonds are traded back and forth.

4) Federal Government is a creditor.
Bond-holders are creditors.
Therefore, new equity should be distributed in relation to debt held. Is government being the vulture here asking more of new equity than they are due?

Don't forget - bond-holders did not ask government to step in. Bond-holders would have been happy to accept their risk and let GM fall to Chapter 11 (better still - Chapter 7).

We bond-holders are only asking that US banktruptcy code is being honoured.

In their latest, vulgar proposition GM suggests that current equity holders get 1 % of new GM equity. Why? They are the owners of present GM. They are the ones with the voting right. Their company has failed.

GM owned by UAW? Would it survive for more than two months?

Dan

April 29, 2009 8:45 PM

I am responding to Alex's comments "I am a private investor who paid 100 cents on the dollar for GM bonds in 2004. I don't see a reason why I should accept to lose 70% of my hard earned money. Either I get back 100% or I get back 0%, which is not much more than the 30%. That's the way I think about the situation. Bondholders who paid less than 30% on the dollar should only get back the money they paid."

First let's get to the truth. I don't know what type of bond he bought but say he bought a bond that matures in 20 years and he bought a $100,000 bond for $25,000 and will get back 30% which is $30,000. How is he losing money. Had he put it in the stock market it would be worth $12,500. He still will make a lot of money. These bondholders are just greedy!!!!

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