The Whores of High Yield: GM PET Bonds

Been following General Motors PET bonds a lot recently.

PET (Preferred Equity Traded) bonds are a family of preferreds that are actually repackaged “retail” bonds with $25 par values. They’re issued directly by the parent company and trade like stocks.

Anyway, these days the GM prefs/PET bonds are paying monstrous current yields—like 12%— and if the company ever manages to gets its shit together, the capital gains on a recovery or call could be excellent, too.

Here are the bonds in question:



By the way, that chart took me a solid hour to research and make, so don't ever say I never do anything for you, you filthy swine.

Anyway, I’ve been watching with great interest as the company’s fortunes slurp deeper and deeper into the economic toilet. Now that they’re good and wedged down in there, is it time to load up?

The chief remaining question to me is whether GM will survive as a company.

In the spring of 2003 I did a similar trade with American Airlines prefs (AAR) right as the company was negotiating with the various unions for concessions to avoid Chapter 11. The CEO was fired, the unions caved, the company stayed alive, and I ended up doing pretty well.

To me, that was much more of a gamble than the current GM situation. It was a bet that the unions would rather take pay cuts than have the company go bankrupt. Fortunately, it worked.

So what about GM?

Well, I don’t know jack shit about finance, but I know how to find those who do. In fact, I buy research from a couple of them, and it's way better than anything I can come up with. One of my favorite fixed income dudes had this to say about the GM matter a few days ago:

FIVE REASONS WHY A GM BANKRUPTCY IS UNLIKELY

The talk about a GM bankruptcy makes for market attention but lacks real substance. There are a number of arguments for why this is so.

1. You have to be eligible to declare bankruptcy; you can't just decide it would be strategically beneficial to do so. GM with $19 billion in cash and a book value of $40 billion hardly meets that test now or for a number of years.

2. GM doesn't need a bankruptcy threat to win concessions from its unions. It has Delphi to do that for them. When the Delphi bankruptcy is concluded, the unions will know what they can expect to win from GM if they force it to use the bankruptcy route. Chances are, they will settle for something close to the Delphi concessions because they have even more to lose with GM.

3. GM as a business is a very valuable franchise. Before it goes into bankruptcy it would likely reach a merger agreement with a foreign car manufacturer much as Chrysler did.

4. Unlike the airlines, GM and its unions have it within their power to fix the problems. There are a variety of ways this can be done short of bankruptcy. The main battle may well be within the UAW pitting young workers against those retired or about to.

5. A bankruptcy filing would be most devastating to GM shareholders. It is the duty of the board of directors and management to do everything to prevent that from happening. While this principal seems to have been ignored in several recent bankruptcies, it seems less likely to happen here. Besides, we have Kirk Kerkorian watching to make sure this doesn't happen. I'd be more worried if he had bought GM debt instead of stock.


Take it or leave it. Me, I'm gonna keep mulling this whole thing over for now, but situations like this always make me feel supremely, mother-humpingly greedy…