Dear Dr. Don,
I have some GM bonds and I just read an article that stated that the government “loan terms also require bondholders to swap part of the company’s debt for equity.” My husband and I bought these bonds for income during retirement, which is where we’re at now.
How can a company make you swap investments — I don’t want stock in GM! Can you tell me what this is all about?
— Sherrilyn Shares
GM is in dire straits and is looking to avoid bankruptcy court by receiving concessions from its labor force and its bondholders. The government has imposed a March 31 deadline for the firm to show it is a viable concern.
GM recently reported a $30.9 billion loss for 2008. It’s a little hard to handicap from the sidelines, but getting bondholders to agree to a debt-for-equity (stock) swap can help GM avoid bankruptcy court and keep it eligible for Troubled Asset Relief Program funds.
Conventional wisdom has it that GM can’t offer bondholders a better deal outside of bankruptcy than they would get in bankruptcy. So, there’s no real incentive for bondholders to agree to a debt-for-equity swap outside of bankruptcy.
GM is trying to coerce bondholders into accepting a debt-for-equity swap now, in advance of a bankruptcy filing, by offering incentives to bondholders who swap. However, bondholders are sitting on the sidelines taking a wait-and-see attitude, which doesn’t do GM any good.
Bondholders are resisting GM’s overtures because it is common for shareholders to lose most, if not all, of the value of their shares in bankruptcy. Bondholders get paid off ahead of stockholders in bankruptcy.
In such a scenario, bonds would still be worth just pennies on the dollar. But that’s better than holding a worthless stock.