Indivdual GM Bondholders Face Tough Choice
by Sharon Terlep in the Wall Street Journal
General Motors Corp. is trying to get bondholders to agree to a debt swap deal. Debra June, a substitute teacher from Stuart, Fla., is an example of why the offer is proving to be a tough sell.
Six years ago Ms. June invested $70,000 in GM bonds, thinking they were a safe bet. But under under the offering GM unveiled two weeks ago, all she would get is some stock worth about $280, according to her own estimate.
“I’m just going to take the bonds and hang them up in my living room. They’re more valuable as wallpaper,” the 52-year-old Ms. June quipped recently while flipping through a 200-page booklet GM sent to bondholders outlining what they could expect in the debt exchange.
Debra June at her home in Stuart, Fla., holding the GM book send to her with instructions for the exchange offer.
GM needs at 90% of its bondholders to accept the deal; otherwise, the company has said, it will be forced to file for bankruptcy protection by June 1.
Many big institutional shareholders that stand to lose millions of dollars on the deal have come out against it in public. An ad hoc committee representing institutions holding about 20% of GM’s debt outstanding have engaged in negotiations with the task force and GM.
But tens of thousands of individual bondholders like Ms. June could become just as significant a snag in GM’s efforts to stay out of bankruptcy court.
The Obama administration has warned bondholders they are unlikely to get more for their bonds if GM goes into Chapter 11 reorganization. This week GM Chief Executive Frederick “Fritz” Henderson acknowledged getting enough bondholders to accept the offer is a long shot and said a bankruptcy filing is “probable.”
Bondholders are roiled in part because they would sustain the deepest cuts under the GM plan. The government, which has lent GM $15.4 billion, would get 51% of GM stock in return for a 50% reduction in the money owed to taxpayers. The United Auto Workers would get 39% of the GM’s equity and about $10 billion in cash to restructure union health-care obligations to retirees.
Many individual investors feel they are being asked to bear more than their share of the sacrifice.
Dennis Buchholtz, a 67-year-old retired tool-and-dye supervisor from Warren, Mich., has $98,000 in GM bonds. Mr. Buchholtz, who gets no pension, uses interest from the bonds that amount to about $600 a month to supplement his social security payments.
About 10% of Mr. Buchholtz’s life savings is invested into GM bonds. He knew the auto maker was on a rough road, but believed company leaders as they insisted for years GM would not go bankrupt. “I didn’t think it would end like this,” she said. “I hoped to enjoy the 7% return I was promised and pass the money on to my kids.”
Chris Crowe, a retired electrician from the Denver suburb of Lakewood, Colo., planned to use the returned principal to eventually send his 13-year-old son to college. He recently flew to Warren, Mich., for a rally supporting small GM bondholders.
“”Bonds are a loan, they are not a speculative stock,” Mr. Crowe said.
Ms. June is worried she will be forced to return to a full-time job. Her loss on the GM bonds will erase about one-fourth of her retirement savings.
Until early this decade, she said, most her savings was in CDs. But with interest rates low, she sought advice on a prudent way to eek out more interest from savings pieced together from decades of work and some inheritance from family members. She didn’t want to invest in stocks because she saw them as too risky.
Bonds seemed to be the answer and Ms. June, who had been a legal secretary for GM earlier in her career, felt the company was a safe bet if not a lucrative one.
“I just figured it would be a great investment,” she said. “I said, ‘There’s no way on earth GM is going to belly up.’ ”