Why bondholders have so much power

Amy Scott May 27, 2009
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Why bondholders have so much power

Amy Scott May 27, 2009
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Kai Ryssdal: As it happens, 27 is also the number in billions of dollars, that General Motors owes its bondholders. They’re the big banks and other institutional investors that GM has borrowed from over the years. Part of the carmaker’s plan to stay out of Chapter 11 hinges on its ability to convince those lenders to take less than they’re entitled to. Probably pennies on the dollar.

Not enough of those bondholders agreed to a stock swap by GM’s cutoff of midnight last night. So it’s now widely expected the company’s not going to be able to meet the White House deadline of Monday for a viable way to avoid bankruptcy. This is — if you remember — exactly the same point the Chrysler bankruptcy turned on, creditors saying “no deal.” We asked Marketplace’s Amy Scott to explain why bondholders get so much say anyway.


AMY SCOTT: The reason is pretty simple.

TED DOBSKI: Bondholders have power because bondholders controlled, in GM’s case, $27 billion worth of debt.

That’s one of GM’s bondholders, Ted Dobski. He’s not with a big hedge fund or institution. He worked at GM for 33 years and now drives for a transportation company in Detroit. He bought the bonds through his retirement plan. In exchange for the federal government’s help, both GM and Chrysler had to convert two-thirds of their debt to equity. That is, stock. So they needed people like Dobski to sign on. He didn’t.

DOBSKI: When you look at what they were giving us, it’s just an absolute no-brainer.

GM offered bondholders stock worth just a fraction of their original investment. Dobski says it would take him about 10 years working to make that back. GM has plenty of big bondholders too. And there’s another reason they’ve wielded so much power in this process. Bankruptcy lawyer Doug Bernstein says many of them have a form of insurance on their bonds. It kicks in, in the event of bankruptcy.

DOUG BERNSTEIN: So there’s no incentive for them to take a compromise. And if they go into bankruptcy, they can make the claim and get paid 100-cent dollars.

For bondholders without that insurance, it’s not clear if they’ll get a better deal in court. All of these bonds are unsecured, meaning there’s no collateral backing them up. Unsecured lenders often get pennies on the dollar in bankruptcy.

In New York, I’m Amy Scott for Marketplace.

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