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GM bonds signal value may top Ford on bailout
(China Daily)
Updated: 2009-06-05 08:11 SOUTHFIELD, Michigan: General Motors Corp bond trading shows investors are betting its government-backed bankruptcy will create a company with a higher market value than Ford Motor Co, the only major US automaker to shun a federal rescue. Bondholders will have a claim to about a 10 percent stake in a so-called "New GM", the government-controlled automaker that will buy the best assets of the old company. That implies a value after bankruptcy exceeding Ford's, according to a June 1 report by Rod Lache, a Deutsche Bank AG analyst. Based on Wednesday's closing bond prices and Deutsche Bank's formula, GM's market value would be about $33.1 billion, underscoring how taxpayer support will prop up the restructured automaker once it leaves court protection. Dearborn, Michigan-based Ford's market value as of Wednesday was $19.9 billion. "You can argue it's worth even more," said Mirko Mikelic, senior portfolio manager at Fifth Third Asset Management in Grand Rapids, Michigan. "The amount of free cash flow is going to be huge now that you're taking off the debt." While Detroit-based GM may regain its standing as the biggest US automaker by market value, it might do so as a smaller company. Revenue at the new GM probably will be $120 billion to $140 billion, Chief Financial Officer Ray Young said this week. Last year's total was $149 billion compared with $146 billion for Ford, the second-largest US automaker by sales.
The projections for post-bankruptcy equity values in the week GM entered Chapter 11 reflect the Treasury's plan to get the company out of court within as few as 60 days. With $65 billion in federal help, GM will shrink its debt to about $17 billion from $172.8 billion. Ford's automotive debt was $25.8 billion, excluding Ford Motor Credit liabilities. "There is an improved perception of value," said Pete Hastings, a fixed-income analyst at Morgan Keegan & Co in Memphis, Tennessee. "People are buying GM bonds in anticipation of a quick exit from bankruptcy." GM's current equity will be wiped out in court once it completes the Chapter 11 proceeding begun on June 1 in US Bankruptcy Court in New York. "The market is currently valuing GM's 'New Co' equity higher than Ford's," said Lache, who is based in New York. Wednesday's projected post-bankruptcy value based on bond prices would be GM's highest since September 2002. GM's $3 billion of 8.375 percent bonds maturing in 2033 jumped 72 percent in value to 12.25 cents on the dollar on Wednesday since May 28, when the government gave details on an exchange offer of a 10 percent equity stake and another 15 percent in stock warrants to erase the company's debt. The notes slid 0.94 cent on the dollar on Wednesday, according to Trace, the bond-price reporting system of the Financial Industry Regulatory Authority. They reached a record low of 4.5 cents on the dollar on May 14. Ford's market value has more than tripled since Nov 7, the day GM disclosed it was running out of cash dwindled after almost $88 billion in losses since the end of 2004. Bloomberg News (China Daily 06/05/2009 page16) |
