paologorgo
Chapter 11
Five years ago, Marjorie Holden paid about $40,000 for some General Motors Corp. bonds, which generate tidy interest ranging from 7.4% to 8.4%. Now the bonds are worth just under $10,000.
The 81-year-old New York widow is watching the negotiations among big, powerful bondholders, the government and the auto unions, which could end up in a settlement leaving her worse off.
"The bondholders are not all rich," says the retired teacher. "I need to conserve my assets."
Thousands of mom-and-pop investors like Ms. Holden own GM bonds, but have seen their value fall along with the fortunes of the auto maker. Just this week GM brought a much tougher offer to bondholders -- to swap their bonds for a small slice of the company's stock.
In talks with GM, a committee of big institutional bond investors has been resisting a settlement. Previously, the company offered a sweeter package that included cash, new bonds and a lot more equity. The latest offer has small bondholders fuming and adds to their feeling of helplessness because the outcome is beyond their control.
e-tenth of that.
About 20% of the GM bondholders are individual investors. Some like Ms. Holden or Mr. Pandolfi bought GM bonds when the auto maker's prospects were much better. This icon of corporate America defined safety to many of them. The bulk of the unsecured bonds, which have a face value of $29 billion, are worth about 15 cents on the dollar.
Other individual GM bond investors are playing the vulture game with the Wall Street pros, trying to benefit from temporary increases in bond prices. That is easier to do with GM because the company has "retail bonds," which have a face value of only $25, and thus are more affordable and liquid than regular bonds, whose face value is $1,000. The GM retail bonds now trade for $2 to $4 each.
David Berger, 36, a Manhattan commercial real-estate broker, says he has made money over the past few months trading in and out of these securities. In March, he had a stake totaling $500,000. Because he has bought so low, they offer a 80% yield. "It's nice to ride the wave," he says.
The situation is grimmer for individual investors who own GM common stock. GM's shares closed at $2.04 Thursday, down from $83 a decade ago and its recent high of $42 in October 2007. If GM ends up in Chapter 11 bankruptcy-court protection, odds are the common stock will be wiped out. But if it can reorganize out of court, lightening its debt load via some kind of exchange offer, the stock likely will rise.
Some small stockholders stay with their shares, but others got in lately and hope to make a profit from even a small bounce in GM's stock. Amid relative optimism about GM, the stock rose from $1.45 a share on March 6 to $3.62 on March 27. It then dipped after the ouster of GM's chief executive, Rick Wagoner.
Dorothy Donovan, 77, who owns a catering business in Farmingdale, Mich., last year bought 200 shares, and is standing pat, thinking that "eventually, GM will turn around."
Many bondholders also are hanging on in hopes that -- some way, somehow -- their losses will eventually be eased via an exchange offer for their bonds.
But in the political and economic maelstrom swirling around the car company, they may be disappointed. The bondholders could be forced to swallow deeper losses than the market has delivered. Moreover, if GM files for bankruptcy protection, it almost surely will cease paying interest. Plus, in a bankruptcy, bondholders will have to wait a long time for a settlement. The typical bankruptcy lasts 18 months.
In a few bankruptcies, bondholders emerge ahead. One example is Mirant Corp., a power-generating firm whose fortunes improved while it was in Chapter 11. Mirant gave bondholders a settlement worth more than the bonds had been worth.
However, that's the exception. GM's fortunes are dwindling. The unsecured bondholders -- their paper isn't backed by collateral -- rank lower on the food chain than do other creditors.
"They'll get what's left over, and the pie is shrinking along with GM's sales," says Peter Chapman, president of Bankruptcy Creditors Service Inc., a research house.
Harley VanDeloo, 69, a retired high-tech marketing representative in Thousand Oaks, Calif., bought $20,000 in GM bonds a year ago, now valued at less than $3,000. Says Mr. VanDeloo, "I thought GM was too big to fail."
Write to Larry Light at [email protected]
http://online.wsj.com/article/SB123940497568709785.html?ru=yahoo&mod=yahoo_hs
The 81-year-old New York widow is watching the negotiations among big, powerful bondholders, the government and the auto unions, which could end up in a settlement leaving her worse off.
"The bondholders are not all rich," says the retired teacher. "I need to conserve my assets."
Thousands of mom-and-pop investors like Ms. Holden own GM bonds, but have seen their value fall along with the fortunes of the auto maker. Just this week GM brought a much tougher offer to bondholders -- to swap their bonds for a small slice of the company's stock.
In talks with GM, a committee of big institutional bond investors has been resisting a settlement. Previously, the company offered a sweeter package that included cash, new bonds and a lot more equity. The latest offer has small bondholders fuming and adds to their feeling of helplessness because the outcome is beyond their control.
e-tenth of that.
About 20% of the GM bondholders are individual investors. Some like Ms. Holden or Mr. Pandolfi bought GM bonds when the auto maker's prospects were much better. This icon of corporate America defined safety to many of them. The bulk of the unsecured bonds, which have a face value of $29 billion, are worth about 15 cents on the dollar.
Other individual GM bond investors are playing the vulture game with the Wall Street pros, trying to benefit from temporary increases in bond prices. That is easier to do with GM because the company has "retail bonds," which have a face value of only $25, and thus are more affordable and liquid than regular bonds, whose face value is $1,000. The GM retail bonds now trade for $2 to $4 each.
David Berger, 36, a Manhattan commercial real-estate broker, says he has made money over the past few months trading in and out of these securities. In March, he had a stake totaling $500,000. Because he has bought so low, they offer a 80% yield. "It's nice to ride the wave," he says.
The situation is grimmer for individual investors who own GM common stock. GM's shares closed at $2.04 Thursday, down from $83 a decade ago and its recent high of $42 in October 2007. If GM ends up in Chapter 11 bankruptcy-court protection, odds are the common stock will be wiped out. But if it can reorganize out of court, lightening its debt load via some kind of exchange offer, the stock likely will rise.
Some small stockholders stay with their shares, but others got in lately and hope to make a profit from even a small bounce in GM's stock. Amid relative optimism about GM, the stock rose from $1.45 a share on March 6 to $3.62 on March 27. It then dipped after the ouster of GM's chief executive, Rick Wagoner.
Dorothy Donovan, 77, who owns a catering business in Farmingdale, Mich., last year bought 200 shares, and is standing pat, thinking that "eventually, GM will turn around."
Many bondholders also are hanging on in hopes that -- some way, somehow -- their losses will eventually be eased via an exchange offer for their bonds.
But in the political and economic maelstrom swirling around the car company, they may be disappointed. The bondholders could be forced to swallow deeper losses than the market has delivered. Moreover, if GM files for bankruptcy protection, it almost surely will cease paying interest. Plus, in a bankruptcy, bondholders will have to wait a long time for a settlement. The typical bankruptcy lasts 18 months.
In a few bankruptcies, bondholders emerge ahead. One example is Mirant Corp., a power-generating firm whose fortunes improved while it was in Chapter 11. Mirant gave bondholders a settlement worth more than the bonds had been worth.
However, that's the exception. GM's fortunes are dwindling. The unsecured bondholders -- their paper isn't backed by collateral -- rank lower on the food chain than do other creditors.
"They'll get what's left over, and the pie is shrinking along with GM's sales," says Peter Chapman, president of Bankruptcy Creditors Service Inc., a research house.
Harley VanDeloo, 69, a retired high-tech marketing representative in Thousand Oaks, Calif., bought $20,000 in GM bonds a year ago, now valued at less than $3,000. Says Mr. VanDeloo, "I thought GM was too big to fail."
Write to Larry Light at [email protected]
http://online.wsj.com/article/SB123940497568709785.html?ru=yahoo&mod=yahoo_hs
