Skip to comments.After Original Bondholders Stiffed, GM Issues New Debt
Posted on 02/25/2016 1:08:22 PM PST by jazusamo
"Fool me once, shame on you; fool me twice shame on me." That is a clichÃ© that investors should keep in mind if they are considering buying into General Motors' latest debt offering. In fact, holders of GM common stock should also assess the growing similarity that New GM has with the bankrupted Old GM.
GM announced last week that it will be offering an estimated $2 billion of unsecured debt to help prop up underfunded pensions with additional proceeds used for general business purposes. The move follows a contradictory continuing dialogue that proclaims the company is so cash rich that it can afford to buy back billions of dollars of common shares as it doles out $11,000 bonuses to UAW workers. GM share performance belies the notion that the company is firing on all cylinders.
Since GM's public offering in late 2010, shares are down over 15% while the S&P 500 index rose about 60%. That's a huge 75% underperformance. Recent data is almost as ugly. Over the past 1 year span, GM shares are down approximately 23% while the S&P 500 is down about 9%. This during a time when auto sales are at record levels.
According to GM's latest SEC filing, the company now has about $23 billion in cash, equivalents and marketable securities on its balance sheet. That compares to approximately $28 billion at the end of 2014. Long term debt grew over the year from roughly $47 billion to the current neighborhood of $63 billion, the majority of which goes to fund GM's lending operations. Pensions were underfunded by about $21 billion.
Practically all of GM Automotive debt (about $8 billion) is considered unsecured as is about $24 billion of GM Financial debt. It is important for potential investors to realize that it was the unsecured GM bondholders who got the shaft when the Obama Administration orchestrated the 2009 bankruptcy process that saw the politically-favored UAW have its interests protected. The UAW continues to have a large investment stake (about $5 billion worth) in GM shares.
GM's ever-struggling share price is the best indicator of just how healthy the company really is. The implication is that GM stock is a classic "value trap" boasting a high dividend yield along with low P/E ratios as stock performance continually underperforms broader markets. Despite the fact that auto sales are at historical highs, cash flow at GM is weakening the balance sheet. This at a time when the company should be looking to preserve cash to weather the inevitable downturn which will eventually hit the auto industry.
The above facts are obvious to savvy professional money managers. That is why GM share price continually languishes. The "smart money" is buying neither the GM management's hype nor the shares. It is the little guy that gets burnt when they invest in GM based on the seemingly rosy financial fundamentals. These are the same Mom and Pop type investors that GM targeted when they offered unsecured debt via public stock exchanges in $25 denominations. Old GM could not get enough money to fund their operations from institutional debt so they tapped into less sophisticated purses and wallets to pay for UAW obligations.
There was no indication that GM will again be offering debt in the same predatory manner in which Old GM did. But given the present GM management's propensity to spend money faster than it is earned while at the same time raising debt levels, it will only be a matter of time before history repeats itself.
The auto industry is both highly cyclical and highly competitive. GM's management team does not seem to have what it takes to be one of the survivors when an eventual shake out occurs. Hopefully taxpayers and unsuspecting investors will not again pay the price for GM to take a second trip through bankruptcy court.
Mark Modica is an NLPC Associate Fellow.
Anyone buying these bonds is a moron. Any CFP recommending them should be stripped of their license.
Back in the 70s (?) when US car makers got Congress to slap import restrictions on foreign cars, GM jacked up their prices and caved to the UAW while issuing huge bonuses to their managers. I swore then, nearly fifty years ago, never to buy another GM car, and I haven’t. Anyone buying bonds, and certainly equity, in this gigantic Pension Plan that makes cars, may as well burn the money for warmth.
Sounds like a GREAT investment!
I don’t buy GM products because they fall apart after a couple of years.
Lurk..... You are right on. Only a fool and his money is soon parted.
What happened to you happened to me in the mid-80s. I avoid anything and everything GM and don't mind griping about them whenever possible.
Worst of all, they waved the American flag while they were picking their customers pockets. “Buy American” was the mantra while they cheapened their quality to save a few bucks at the expense of their customers.
Check out the underwriters:
Goldman, Sachs & Co.
Citigroup Global Markets Inc., c/o Broadridge
Merrill Lynch, Pierce, Fenner & Smith Incorporated
Haven’t they been bought by some foreign conglomeration and aren’t they moving mush of their production to china...give me a reason to let them screw me again!
Hey, maybe they finally ran out of TARP money.
This situation was predictable since they were not obligated to fix the issues that caused the bankruptcy in the first place.
Why? Because the government bailed them out and the tough cost cutting, quality improvement decisions were not made that make the company viable and competitive again.
There’s not a reason in the world out there to let them screw me again.
GM is a benefits company that happens to make cars.
Really? My 2011 Silverado will probably have right about 200,000 miles on it on its 5th birthday and I couldn’t ask for a better vehicle. We’ll be driving it across the country for the 4th time for Field Target nationals in October. Each of the 5 new Saturns we bought were still running like tops at 200k or we still have them (wagon with 237k and SKY redline w/~160k).
“...this gigantic Pension Plan that makes cars...”
Awesome! I just haven’t had much luck with them. Full disclosure: I like American cars...as long as they are not Chevy or Chrysler. Ha. Just fooling with you.
My 4 x 4 2003 F-250 is about to turn over to 207,000 miles, in great shape because I’m pretty careful with it. Was at a convenience store yesterday and a car dealer offered me 10k cash on the spot. No deal!
I still have GM stock, I want my money back!
Key words "De-Risking", "Mark to Market" & Pension Buyouts.
Ford and GM Pension Liabilities Compared with some great graphs: http://www.pionline.com/article/20160107/ONLINE/160109913/ford-moves-to-mark-to-market-accounting-for-pension-funds
Back when GM stiffed the bondholders, the Atty General of Indiana filed a class action suit against GM for the benefit of the bondholders. Does anyone know what ever happened with that lawsuit, or was it deep sixed?
I remember at the time, the bondholders had a good case against GM, but that was after the dimrats took over and laws are what they say they are. Seems to me that that was a huge breach of contract case.
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