Credit default swaps and GM
Hedge funds and other investors stand to make billions of dollars on credit insurance contracts if GM declares bankruptcy, a prospect that is complicating efforts to persuade creditors to agree to a restructuring plan for the automaker, analysts say.
Holders of $27bn in GM bonds have until June 1 to decide whether to swap their debt for a 10 per cent equity stake in the company as part of an offer that would give the US government 50 per cent of the shares, a United Auto Workers union healthcare fund 39 per cent and existing shareholders 1 per cent.
However, analysts say the chances the proposal will be accepted have been diminished by the large number of credit default swap (CDS) contracts written on GM’s debt.
Holders of such swaps would be paid in the event of a default – but would lose money if they agreed to restructure GM’s debt. For investors who own bonds and CDS, this could create an incentive to favour a bankruptcy filing.
Here’s what AIG’s outgoing CEO Liddy had to say when questioned by a Congressional panel:
“I don’t know,” said Liddy. “I saw that question some place and I just don’t have any information on it.”
That was on May 13th. Anyone has any update since then?
Here’s something that’s just been reported on NYT:
General Motors said Thursday that a key group representing many of its largest bondholders had accepted a proposal offering up to a 25 percent stake in exchange for not opposing G.M.’s reorganization plan.
In a regulatory filing, G.M. also filled out many of the details of the reorganization plan, crafted under the eye of the Treasury Department.
Under the terms of the deal, G.M.’s bondholders would receive a 10 percent stake in the newly reorganized carmaker. They will also receive warrants to buy an additional 15 percent of a new G.M. if the company rises to a certain level of value.