Myths Busted: New GM FAQ

[dannyg]

Didn't I read that the secured creditors WERE paid back as part of the bankruptcy proceedings? Something like $10 billion of secured credit to big banks like JPMorgan, Citi, etc? It is the unsecured creditors that took a bath.

[nsap]

Originally Posted by dannyg

Didn't I read that the secured creditors WERE paid back as part of the bankruptcy proceedings? Something like $10 billion of secured credit to big banks like JPMorgan, Citi, etc? It is the unsecured creditors that took a bath.

GM worked out a deal with secured creditors (there wasn't much secured debt with GM) prior to bankruptcy.

[TAMark]

Originally Posted by PhishPhood

Yes you're right he was expecting ( actually he was hoping ) to get his full face value back when the bond matured. But that's why every prospectus has the risk disclaimer. He knew what he was doing. He actually loaned GM the money based on a promise.

That's why I used the example of you borrowing $1000 from your brother.

The investor's bonds carried the same weight as you borrowing that $1000. If you don't repay it to your brother when in BK then he can't come back at you in any way and you don't have to repay him. It won't make your relationship very smooth but there's nothing he can do to force you to pay him.

It is just a paper shuffle because the $10 million investor simply gave GM that money based on a promise. GM used his money over the subsequent 10 yrs to pay dividends, buy machinery, pay wages, etc, etc, etc. but they had no responsibility to pay him back.....unless the bonds went to maturity. If the bonds did go to maturity and assuming BK did not intervene then what GM would do ( as every company does ) is go into the bond market and borrow more money!!! The new borrowings would be used to retire the 20 y.o. debt and for additional corporate purposes ( common terminology in prospectuses ). Basically they were rolling the old debt forward another 20 yrs. This is called leverage.

Appreciate the insight into the financial ways of big business. Just as it is very difficult for people to get credit after BK, isn't it going to be nearly impossible for the new GM to sell bonds? Guess they just jack the interest rate until they sell?

[Rocket 88]

Originally Posted by PhishPhood

Hello, welcome to the world of business. When I was VP for what is now the largest steel company in the world this exact situation occured 5-10 times a year - every year - just within our own customer base. This is part of business. Nice of you to join the business world.

I'm not sure I follow what your saying. Some of your customers would declare bankruptcy and reopen as a new entity? Is that what you are saying.

If so, that is definately not a new event, but I think several new "creative" manuvers happened in the Chrysler and GM bankruptcies in which traditional bankruptcy proceedings were thrown out.

[dannyg]

Originally Posted by nsap

GM worked out a deal with secured creditors (there wasn't much secured debt with GM) prior to bankruptcy.

Got it, thanks. It looks like there was only $6B of secured debt not $10B as I first thought. All of it was paid out of the Treasury's $50B. The unsecured debtors got part of the "new GM" which may or may not be worth something someday.

http://www.thetruthaboutcars.com/gm-...on-6b-in-debt/

[PhishPhood]

Originally Posted by Rocket 88

I'm not sure I follow what your saying. Some of your customers would declare bankruptcy and reopen as a new entity? Is that what you are saying.

If so, that is definately not a new event, but I think several new "creative" manuvers happened in the Chrysler and GM bankruptcies in which traditional bankruptcy proceedings were thrown out.

Yes absolutely this is what happened many times per year. Also every BK proceeding was different. Everyone of these proceedings was 'customized'.

Your reference to new 'creative' manuvers is just not accurate. You can look it up. Sect 363 sales have been around for a while. It's just so happened that these were two high profile cases that drew all kinds of attention. However, these events happen every week all over the country the cases are just smaller. There is no such thing as a 'traditional' bankruptcy...every one is different because every situation is different.

I will grant that the one new situation that did occur was that when these two companies went into BK the banking industry was in a shambles after its near meltdown in Sept. The banking industry usually is very very willing to offer DIP financing to Ch 11 companies because the money is guaranteed and it's good money for a shortterm. The main problem in the GM & C Ch 11 bankruptcies was that the none of the banks was willing or able to offer any DIP financing. THAT was different.

[PhishPhood]

Originally Posted by TAMark

Appreciate the insight into the financial ways of big business. Just as it is very difficult for people to get credit after BK, isn't it going to be nearly impossible for the new GM to sell bonds? Guess they just jack the interest rate until they sell?

Yes it will be somewhat more difficult for GM to get new financing in the future. However this is what lenders and borrowers do every day. Somehow if there's money to be made then the banks will find a way to lend the new GM some money.

In the end 'money' talks as usual. Money and profits have no morals and no memory. If the ones that took a bath on old GM can make money on the new GM they will.

[GM_Guy81]

Very well done post. Its nice to consolidate some information in one place for casual readers.

[newclasshero]

But doesn't this mean that the government will actually be running General Motors?
And after all, everything the government touches screws up.
For example, stop lights, the Hoover dam and public libraries.

[GM-Joe]

Well planned and that is all that could have been done.

[Rocket 88]

Originally Posted by PhishPhood

Yes absolutely this is what happened many times per year. Also every BK proceeding was different. Everyone these proceedings was 'customized'.

Your reference to new 'creative' manuvers is just not accurate. You can look it up. Sect 363 sales have been around for a while. It's just so happened that these were two high profile cases that drew all kinds of attention. However, these events happen every week all over the country the cases are just smaller. There is no such thing as a 'traditional' bankruptcy...every one is different because every situation is different.

I will grant that the one new situation is that when these two companies went into BK the banking industry is in shambles after its near meltdown in Sept. The banking industry usually is very very willing to offer DIP financing to Ch 11 companies because the money is guaranteed and it's good money for a shortterm. The main problem in the GM & C Ch 11 bankruptcies was that the none of the banks was willing or able to offer any DIP financing. THAT was different.

Thanks for the info, though its kind of depressing to think this is "normal"

[Elvisuperman]

I read this info in the newspaper yesterday...great communication, clarity and transperancy on GM's part. This is what they need to continue doing from now on. They're off to a good start, hopefully they learned a thing or two from there first 100 years in the business.

[fyreline]

As a long-time GM stockolder who now has nothing to show for it except a nicely framed certificate on the wall (at least the frame is worth something!) . . . .

I'm still glad they're back. Bitterness gains you nothing. All business investment is a risk. And we move on . . . .

[Hunid Racks]

Originally Posted by PhishPhood

Yes you're right he was expecting ( actually he was hoping ) to get his full face value back when the bond matured. But that's why every prospectus has the risk disclaimer. He knew what he was doing. He actually loaned GM the money based on a promise.

That's why I used the example of you borrowing $1000 from your brother.

The investor's bonds carried the same weight as you borrowing that $1000. If you don't repay it to your brother when in BK then he can't come back at you in any way and you don't have to repay him. It won't make your relationship very smooth but there's nothing he can do to force you to pay him.

It is just a paper shuffle because the $10 million investor simply gave GM that money based on a promise. GM used his money over the subsequent 10 yrs to pay dividends, buy machinery, pay wages, etc, etc, etc. but they had no responsibility to pay him back.....unless the bonds went to maturity. If the bonds did go to maturity and assuming BK did not intervene then what GM would do ( as every company does ) is go into the bond market and borrow more money!!! The new borrowings would be used to retire the 20 y.o. debt and for additional corporate purposes ( common terminology in prospectuses ). Basically they were rolling the old debt forward another 20 yrs. This is called leverage.

Nothing stopping anybody from selling their original note for less than face.

Nothing stopping anybody from buying at less than face either.

[ejfx]

Originally Posted by prototype66

Sounds like the ducks are in a row.

Right...now maybe all these frantic GMI members will get off the window ledges and bridges...there is no need to jump anymore!