Those Rapacious GM Bondholders!

[Corlyss_D]

Individual GM Bondholders Face Tough Choice
By SHARON TERLEP

General Motors Corp. is trying to get bondholders to agree to a debt swap deal. Debra June, a substitute teacher from Stuart, Fla., is an example of why the offer is proving to be a tough sell.

Six years ago Ms. June invested $70,000 in GM bonds, thinking they were a safe bet. But under under the offering GM unveiled two weeks ago, all she would get is some stock worth about $280, according to her own estimate.

“I’m just going to take the bonds and hang them up in my living room. They’re more valuable as wallpaper,” the 52-year-old Ms. June quipped recently while flipping through a 200-page booklet GM sent to bondholders outlining what they could expect in the debt exchange.

View Full Image
Barbara P. Fernandez for The Wall Street Journal

Debra June at her home in Stuart, Fla., holding the GM book send to her with instructions for the exchange offer.

In hopes of staving off a bankruptcy filing, GM has offered to swap $27 billion for 10% of the company’s stock, which is now trading at its lowest level since the Great Depression. The offer, which runs through May 26, was crafted under close supervision of the Obama administration’s auto task force.

GM needs at 90% of its bondholders to accept the deal; otherwise, the company has said, it will be forced to file for bankruptcy protection by June 1.

Many big institutional shareholders that stand to lose millions of dollars on the deal have come out against it in public. An ad hoc committee representing institutions holding about 20% of GM’s debt outstanding have engaged in negotiations with the task force and GM.

But tens of thousands of individual bondholders like Ms. June could become just as significant a snag in GM’s efforts to stay out of bankruptcy court.

The Obama administration has warned bondholders they are unlikely to get more for their bonds if GM goes into Chapter 11 reorganization. This week GM Chief Executive Frederick “Fritz” Henderson acknowledged getting enough bondholders to accept the offer is a long shot and said a bankruptcy filing is “probable.”

Bondholders are roiled in part because they would sustain the deepest cuts under the GM plan. The government, which has lent GM $15.4 billion, would get 51% of GM stock in return for a 50% reduction in the money owed to taxpayers. The United Auto Workers would get 39% of the GM’s equity and about $10 billion in cash to restructure union health-care obligations to retirees.

Many individual investors feel they are being asked to bear more than their share of the sacrifice.

Dennis Buchholtz, a 67-year-old retired tool-and-dye supervisor from Warren, Mich., has $98,000 in GM bonds. Mr. Buchholtz, who gets no pension, uses interest from the bonds that amount to about $600 a month to supplement his social security payments.

About 10% of Mr. Buchholtz’s life savings is invested into GM bonds. He knew the auto maker was on a rough road, but believed company leaders as they insisted for years GM would not go bankrupt. “I didn’t think it would end like this,” she said. “I hoped to enjoy the 7% return I was promised and pass the money on to my kids.”

Chris Crowe, a retired electrician from the Denver suburb of Lakewood, Colo., planned to use the returned principal to eventually send his 13-year-old son to college. He recently flew to Warren, Mich., for a rally supporting small GM bondholders.

“”Bonds are a loan, they are not a speculative stock,” Mr. Crowe said.

Ms. June is worried she will be forced to return to a full-time job. Her loss on the GM bonds will erase about one-fourth of her retirement savings.

Until early this decade, she said, most her savings was in CDs. But with interest rates low, she sought advice on a prudent way to eek out more interest from savings pieced together from decades of work and some inheritance from family members. She didn’t want to invest in stocks because she saw them as too risky.

Bonds seemed to be the answer and Ms. June, who had been a legal secretary for GM earlier in her career, felt the company was a safe bet if not a lucrative one.

“I just figured it would be a great investment,” she said. “I said, ‘There’s no way on earth GM is going to belly up.’ ”

Write to Sharon Terlep at sharon.terlep@dowjones.com

[JackC]

The bondholders are getting screwed. They would be still be screwed even if the Union was getting less of a sweatheart deal out of Obama, but then, that's the risk you run when you lend your money to someone who can't pay it back.

Of course, because the union will now be the primary entity depending on the success of GM, you can bet that Obama and the Dems will be there with the cash when GM needs its next bailout. And we won't have to wait long for the next bailout. Wouldn't you love to be present at the next set of contract "negotiations" between the union and GM, which is almost controlled by the union. What a farce.

Meanwhile better engineered cars, by better companies who will pay their workers less than the union will demand from GM will continue to eat GM's lunch. So keep your wallets handy.

[lmpower]

The lesson from this is to diversify your investments. Putting all your eggs in one basket is risky, even if you believe it to be a strong basket at the time.

[jbuck919]

The lesson from this is to diversify your investments. Putting all your eggs in one basket is risky, even if you believe it to be a strong basket at the time.

Then again, when the "basket" is the entire range of investment possibilities for ordinary people in the world economy....

[slofstra]

You buy bonds with the understanding that you will be paid before stockholders. So I'm with the bondholders on this one.

Anyone know which has a higher priority claim in bankruptcy, bonds or unfunded pension obligations? That is would future pensions for active employees normally be paid before bondholders.