GM Bonds Signal Market Value Topping Ford’s on Federal Bailout
By Jeff Green and Caroline Salas
bloomberg.com
June 4 (Bloomberg) -- 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 U.S. 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 yesterday’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 yesterday 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 U.S. 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 U.S. automaker by sales.
The projections for post-bankruptcy equity values in the week GM entered Chapter 11 reflect 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.
‘Improved Perception’
“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 U.S. 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. Yesterday’s projected post-bankruptcy value based on bond prices would be GM’s highest since September 2002.
GM’s Bonds
GM’s $3 billion of 8.375 percent bonds maturing in 2033 jumped 72 percent in value to 12.25 cents on the dollar yesterday 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 yesterday, 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. Ford, which has posted three straight annual losses, avoided a bailout by borrowing $23 billion in late 2006 to cope with the deficits while shutting plants and adding new models.
“Regardless of GM’s or any other company’s situation, a core part of our plan is to strengthen our balance sheet and we’re going to continue to find ways to do that,” said Mark Truby, a Ford spokesman.
Ford’s Shares, Bonds
Ford fell 23 cents, or 3.6 percent, to $6.18 yesterday in New York Stock Exchange composite trading. The shares have more than doubled this year for the second-biggest gain among companies in the Standard & Poor’s 500 Index.
Ford’s 7.45 percent bonds due July 2031 climbed 1.25 cents to 65 cents on the dollar, yielding 12 percent, according to Trace, the bond-price reporting service of the Financial Industry Regulatory Authority. That’s the highest price since June 2008.
GM’s government-backed debt reduction provides several benefits, said Fifth Third’s Mikelic, who helps manage $14 billion in fixed-income assets including GMAC LLC and Ford Motor Credit bonds.
Besides the lower debt load, GM will have latitude in bankruptcy court to rework contracts and dump dealers, he said. GM plans to cut 40 percent of retail outlets, shutter 30 percent of its U.S. factories and slash the number of domestic brands in half.
Bondholders’ Recovery
GM bondholders “realistically” have a chance to recover 10 cents on the dollar, CreditSights Inc. analysts led by Glenn Reynolds in New York said in a May 31 report. The investors may get as much as 15 cents on the dollar “under a major GM success story” and a market value of $30 billion, Reynolds wrote.
“Much higher -- and consistent -- levels of profitability” will be needed to keep that market value, Reynolds wrote. “It takes more than government debt-to-equity swaps.”
Ford’s recent successes, after a record $14.7 billion loss last year, have come without federal help.
The automaker used an exchange program to pare debt by $9.9 billion this year and raised $1.6 billion with a public offering of 345 million shares. Ford boosted third-quarter North American production this week as it chases sales from GM and Chrysler LLC, which filed for Chapter 11 on April 30.
GM’s projected market value is emblematic of its “big advantage” over Ford, because of President Barack Obama’s pledge to keep the bankrupt automaker in business, Mikelic said.
“You have to count the cash,” he said. “Ford doesn’t have that unlimited checkbook. GM will not be allowed to fail.”
To contact the reporters on this story: Jeff Green in Southfield, Michigan at jgreen16@bloomberg.net; Caroline Salas in New York at csalas1@bloomberg.net.
Last Updated: June 4, 2009 00:01 EDT |
