Will the real bondholders please stand up?
There are two players at the negotiating table with General Motors, Chrysler and the White House who have a lot of chips to play with in the next six weeks—the United Auto Workers and bond holders.
We know who the union is. But we have far fewer specifics about the bond holders because they are private investors. During the Congressional hearings with the automakers last November and December, Senator Bob Corker said the vast majority were mutual funds and private equity investors who purchased GM debt at between 15 cents and 25 cents on the dollar.
Big-time pension funds, for example, wouldn’t be holding the debt because the debt is too risky. And had they bought the debt when it was issued, they would have had by-law triggers that would forced them to sell it long before the trading price sunk to 15 cents on the dollar.
But Glen Reynolds, CEO and founder of CreditSights research in New York recently told Reuters that the bond holders ARE mostly pension funds, mutual funds, insurance policy holders, retirement savings plans and “other investors.” Wall Street and so-called vulture investors, he said, make up a distinct minority.
There seems to be a difference of opinion about just who these bond holders are. A private equity investor I spoke with this week said he would be very surprised if most of the holders at this point weren’t “vulture funds” who scoop up debt at low prices with the intention and strategy of making a nuisance of themselves to the issuer.
Reynolds says: “The bondholders have to be very guarded about being used as the swing factor in the restructuring…It has to be equal with the UAW’s contributions. The bondholders need to make sure they get an ‘equity play’ in the exchange that will require a significant UAW contribution on the balance sheet and cost front, he said.
I’m a bit baffled over why the UAW is supposed to make a sacrifice proportional to the bond holders to keep GM out of Chapter 11. After all, whoever is holding GM unsecured debt falls into one of two categories—vultures or investors too stupid to not have sold the debt a long time ago. When they bought GM’s debt, they took a risk, not unlike if they had bought GM’s stock. Ditto those investors holding Ford’s unsecured debt.
Unlike the ratings for mortgage-backed securities, ratings agencies have been solid on downgrading GM and Ford debt along the way the last few years. These investors knew exactly what they were getting into. They have PHDs, after all, examining their risk when they invest.
The UAW, by contrast, are workers. They go to factories each day to screw and weld together the vehicles and engines they are directed to build. They didn’t design them, and they are not responsible for marketing them. These are generally folks with high school educations or less, who have been doggedly helping, and succeeding, to narrow the quality and productivity gap with Asian rivals to almost insignificant levels. They are people who take some level of risk by buying houses near plants they hope will continue to operate. But is that the same risk as bond holders?
No question that the UAW and retirees shsould be prepared to pay higher healthcare premiums. The lack of national healthcare in the U.S. is the failure of lawmakers. But it’s the busted system we have to live with, and it is the biggest factor killing American industrial competitiveness.
But it seems a reach to me to demand that bond holders and the union should be expected to negotiate in lockstep with the automakers in terms of making sacrifices.
I suppose the debt holders think they nay get the 30 cents on the dollar being suggested if GM is in bankruptcy court. So, they have little to lose by holding out for more. But I wouldn’t count on it. Unsecured debt holders will likely be screwed in bankruptcy court.
No, they are betting that the Obama Administration will do anything to keep these companies from going into bankruptcy court. That’s the game being played.
The union, meantime, represented by an army of lawyers and Wall Street advisors, is trying to keep from being played for chumps by sacrificing hard-won healthcare benefits, while bond holders who paid 20 cents on the dollar get a windfall of being paid off more than 30 cents.
These are not equal constituencies. But they are in the same poker game.