Unfair offer to GM bondholders

If you are a GM bondholder (full disclosure I am) then you should be extremely pissed off right now.  Has the government lost its mind?  I mean really, trying to coerce GM into making this ridiculous offer to bondholders of 225 shares per $1,000 or principle of debt you own.

While this may seem good let’s look at the proposed final numbers of all parties.

• They have asked to government to convert half of their debt to a controlling equity position.  They have currently given approximately $15 billion, but expected to be up to $20 billion thru June 1 so they have to give up $10 billion.
• The VEBA exchanges $10 billion of the $20 billion in debt they have been promised.
• Together the US Government and VEBA get 89% of new equity for a combined retirement of $20 billion.
• The existing bondholders exchange their bonds for 225 (pre reverse split adjusted shares) for every $1,000 of principle.  If you read the prospectus carefully there will be a 1-100 reverse split after the debt exchange.  So for every $1,000 you get two shares of the new GM.
• In total the existing bondholders, which hold $28 billion in debt, (if you are doing the math, that is $8 billion more than the government and VEBA put together) will get at most 10% of the new GM.

What is the reason for this discrepancy you ask?  Well according to the SEC filing by GM, “We determined the foregoing GM common stock allocations following discussions with the U.S. Treasury where the U.S. Treasury indicated that it would not be supportive of higher allocations to the holders of old notes or to existing GM common stockholders.”

I don’t understand the reasoning for these allocation splits, but I see no reason for any bondholders to tender under these terms.  In the interest of full disclosure I am long GM retail bonds (GMS) at the time of writing this.

Please read the disclaimer.  I am not a licensed financial adviser and the opinions expressed are mine alone and not meant to constitute any investment advice.  Please do your own due diligence prior to purchasing any security.