General Motor Corp.'s expected bankruptcy filing and massive U.S. Treasury debt issuance this year will drive up the cost of capital, at least in the short term, threatening the incipient economy recovery, managers say.
“It's like a stone that gets thrown into a lake: the bigger the stone, the bigger the ripple,” said Jonathan Rosenthal, co-portfolio manager at Saybrook Capital LLC., a Santa Monica, Calif.-based hedge fund, fixed-income and private equity manager.
“It doesn't get any bigger than GM.”
The question is how big of a risk premium investors will demand from the government and corporations.
Some investors, such as Mr. Rosenthal, believe that unsecured bondholders were shabbily treated in negotiations with the government and GM, and that will escalate risk premiums.
Under a restructuring proposal GM unveiled May 28 in a Securities and Exchange Commission filing, the Department of the Treasury would initially own 72.5% of a new GM company; the UAW voluntary employee beneficiary association, 17.5%; and unsecured bondholders, 10%.
In addition, the bondholders would receive warrants to acquire 15% of the new GM, exercisable over the next 10 years as new shares are issued. Ultimately, the bondholders could wind up owning more than 15%, should they exercise the warrants, depending on the dilution any new shares has on the bondholders' 10% initial equity and the original equity of the Treasury Department and the GM VEBA.
The new GM would have $17 billion in debt, including $8 billion owed to the Treasury and $2.5 billion to the VEBA.
This proposed restructuring goes against the laws of “financial physics,” said Mr. Rosenthal “What the government tried to do in Chrysler (LLC) and what it is doing with GM is allowing the union claim to step in front of the bondholders.”
“When you move pieces in unpredictable ways, worldwide investors feel that risks are higher and the U.S. becomes a less attractive repository of capital. and they will require higher return,” Mr. Rosenthal said.