Thursday, May 7, 2009

GM Bonds Exchange Offers & Consent Solicitations




Everybody is well aware of the Global Economic meltdown specially so of the US Auto Industry.

We will try and understand the GM Exchange offer and Consent Solicitations. Here are some of the important points.
1. Public GM Bonds holders who are individuals and institutions have been offered an Exchange of 1,000USD face value bonds with 225 GM shares.
2. These 225 GM shares would then be reverse split into 1:100 ie 2.25 GM Shares.(lets Say New GM shares just so that we can differentiate between the two)
3. GM is not going to issue fractional shares so anybody holding USD 1,000 face value bonds will actually receive only 2 shares (not 2.25 shares) and there will be no compensation for the loss of value for the fractional shares.
4. GM is going to pay interest in cash for the bonds/debentures till June 30,2009
5. Sale of the new GM shares will not result in Taxable income as the shares are part of the settlement/reorganisation hence not taxable.
6. My Calculation is that after the 100:1 reverse split the equity of GM will remain the same around 660 million shares.
7. Successfull exchange will result in atleast reduction in 44 billion reduction in total liabilities from bond holders, US Treasury and VEBA.
8. Current Bond holders will hold 10% of GM after exchange offer.
9. Current GM common stock holders would represent 1% of the new Equity
10. US Treasury and VEBA would hold 89% of new GM Stock
11. Current GM stock holders who may have fractional holdings after the 1:100 reverse split will receive the market price of the GM shares.
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Let us take an example of 100 bonds of BGM (CUSPID: 370-422-725) and see what the end result will be. Is it worth taking the risk of buying these face value USD 25 bonds for 1.60 USD (I have 100 BGM bonds)

100 bonds Cost = 160USD
Face value of 100 Bonds = 100 * 25 = 2500 USD
Interest received by June 30,2009 = 9.22 * 2.5 = USD 23.05 (paid in cash)
So actual Cost of 100 BGM bonds = 160 - 23.05 = 136.95USD
No of New shares = 2
Cost of new shares = 136.95/2 = 68.645USD
So if the new shares trade over 68.645 buying 100 BGM bonds is a good bet.
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the cost will reduce if we consider 100,000 face value bonds (since no loss of fractional shares)
if we consider 4000 BGM bonds (Face value would be 100,000) that would cost 6400USD.
Subtract the interest income (100 * 9.22) USD 922 Input cost will be 5478 USD.
Cost of 225 shares would be 5478 / 225 = 24.34USD
So at a price greater than 24.34 you will be making tax free profits on a short term basis.
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My take:
1. Buying GM bonds is not for the faint of heart..
2. Buy atleast 100,000 Face value bonds to prevent losses due to fractional shares being cancelled by GM
2. Buy bonds/debentures which have a high interest payout by GM (list of interest rates here)
3. Also please read the original Exchange Offer document
here. This document mentiones about the tax free status and the fractional share cancellation and a lot more.

Please note: These are my individual views and interpretation of the offer. Please follow the following link to get original offer documents in GM site.

8 comments:

Anonymous said...

I believe your math may be wrong. I have come to a similar proposition, however it rings profitable as the deal stands now. I think your views on valuation POST split against presplit are missing a key component. Best of luck =)

Anonymous said...

Thanks for visiting the blog:

based on the calculation of buying 100,000 Face value bonds post split cost price is close to 24.34USD(BGM). There I dont see any possibility of an error.

I am sure the largest investors is not you and me but the large financial institutions like PIMCO and they would have dont this simple maths.

Which makes us come to the point of profitability .. since the news is already in the market the news must have been discounted in the current market price.

Generally a stock about to split will be valued at a higher valuation post split.
I am assuming the same is the case with the GM bonds and the holding cost has been included into the current market price and post split the total price we receive will be atleast 50% more than the current investment (considering the risk of delay and other unsettled issues)

After a certain amount of deep diving the final decision is your gut feeling. Actual price only time will tell.

PN: these are my views and not a vote/suggestion to buy or sell. Please make your own informed decisions.

=happy investing.

Anonymous said...

Are you high? Do you enjoy putting a gun inyour mouth and suggesting others do the same?

Oxcartog said...

I think 40,00 face will get you 900 presplit and 9 after as a minimum out of pocket to play most efficiently.

Whay aren't all the arbitrage guys all over this thing though?

Anonymous said...

Anonymous: Are you high? Do you enjoy putting a gun>>

Well I did mention that investment in GM bonds is not for "the faint of heart.."

In any bankruptcy generally bond holders receive 30 cents to a dollar. (A very broad statement but thats the guideline)

GM has a lot of good assets and is profitable in asia pacific (china)

What I was trying to do is try and understand/interpret the offer from GM.
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Now that the offer has been rejected we will need to see the result of the bankruptcy proceedings..
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if GM can prevent a bankruptcy then its going to be a big bonus..

=happy investing

Oxcartog said...

OK, maybe I have figured out the wild card here: Nobody knows exactly how much more the government will have to put in. Unsecured creditors are way at the end of the line in Chapter 11. How much the gov't has put in will determine how much is left for unsecured class.

At least the storied bonds of Chrysler are secured.

Anonymous said...

It's moot by now, but your math on the first part is off. $2500 face gets you 5 shares post reverse split.

What'sUp Prahalad said...

Anonymous:

I think I will still stand by my decision that as an investor who bought BGM bonds in lots of 100,000 face value (investing 6400USD) will really make a ton of money from the restructuring..

Infact the profits will be tax free..

Ofcourse there were some complexities added to deter the individual investors..
1. Registration of Bond holders (if you donot register as a bond holder then you loose the rights to get the shares of new GM !! )
2. There was a specific date by which you need to register else you are not on their list.. of recepients(even though you hold the bonds!!)

Anyway.. all said and done if you are a tough nut to crack and jump through all the hoops on your path.. an individual investor could make some serious money from the unsecured debt of GM...
(6400USD would be worth 100,000 tax free!! All depends on the listing price of the new GM stock)

=happy investing
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