Will GM go into chapter 11 bankruptcy? It’s the question everyone keeps asking and, to be completely honest, I can’t be sure. But the letters G M A I G C D S hold part of the answer.

GM’s bond holders, essentially investors that lent the company lots of money, have been asked by GM to swap all the money they’re owed for shares in the company. This debt-for-equity swap, as it’s known, would leave them owning 10 per cent of the company.

In the good old days that would be a significant holding, but GM’s total value (its market capitalisation) is now just $1.25bn, which means that the bond holders would get $125m of shares. Whereas their $27bn of bonds are trading at around a tenth of their face value and worth $2.7bn on today’s market. Unsurprisingly the bondholders committee has reacted as enthusiastically as a turkey at Christmas:

“The current offer is neither reasonable nor adequate. Both the union and the bondholders hold unsecured claims against GM. However, the union’s VEBA would receive a 50 percent recovery in cash and a 39 per cent stake in a new GM for its $20 billion in obligations; while bond holders, who own more than $27 billion in GM bonds and have the same legal rights as the unions, would only receive a mere 10 per cent of the restructured company and essentially no cash.”

What about those letters then? Well, it seems that most of GM’s institutional bond holders will have hedged their bets and insured their bonds against default - what’s called a Credit Default Swap or CDS. All those who took out this insurance with AIG, now 80 per cent owned by the US government, will be expecting to get all their money back if GM goes bankrupt... from the US taxpayer.

So, GMAIGCDS. QED

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