Is Uncle Sam Getting in the Automotive Business?
Posted by Larry Doyle on April 27, 2009 4:17 PM |
The proposal made by General Motors to its bondholders today for a debt to equity swap, in my opinion, virtually guarantees a bankruptcy proceeding.
Based on the proposal put forth by GM (and you know they are working in lock step with the government task force headed by Steve Rattner), Uncle Sam and the UAW will have an 89% equity stake in the company while the bondholders would be paid 38 cents on the dollar for an 11% stake in the company. The bonds of GM have been trading in the vicinity of 15 cents on the dollar so the bondholders are receiving a premium, but for a heavily diluted equity stake.
In addition to the financial proposal, GM is putting forth plans for more layoffs, plant closings, and discontinuing the Pontiac brand.
While various constituencies within General Motors along with creditors and the UAW may debate the relative merits of the proposal, ultimately this company will be a government owned and managed enterprise. The FT provides clear analysis, U.S. To Take Majority GM Stake.
The automotive situation again highlights the predicament of measuring government intentions for those looking to invest in the markets. That predicament rests in the conundrum of standard return on capital versus promoting an administration’s social program.
While the FT may report,
“The Treasury has not demonstrated any interest in actually running the company. They want to make sure the company runs well for the shareholders and various constituencies”.
The fact remains, it is highly likely that Uncle Sam will in fact be the largest shareholder and will influence the manner in which GM operates.