"Please go away leave me alone. Don't bother me." - The Beatles.
This is something that fixed income investors may want to consider telling the government. In fact, some have been telling the government just that by deliberately avoiding investing in companies which could attract government interest. Such companies include TARP banks which may not be able (or permitted) to bay back TARP funds in the near future and companies with union workforces. The mishandling of GSE preferreds and the ill treatment afforded Chrysler senior secured creditors and GM bondholders have investors running for the hills when the government comes calling.
As predicted, GM bondholders wanted nothing to do with a bond for equity exchange which would have left them with a lilliputian 10% ownership of the company at the very subordinate equity level of the capital structure. As I have reported previously, large institutional bondholders are hedged to varying degrees with credit default swaps. This will result in substantial recovery for said bondholders. However, small bondholders may not fair so well.
When CDS contracts are settled in the traditional fashion. The seller of default protection pays the buyer of protection par (100 cents on the dollar) for the number of bonds insured. The buyer of protection then surrenders his or her bonds to the seller of protection who will seek compensation in bankruptcy. The result is that that the current bondholders may not be the parties negotiating in court. It could be companies such as TARP banks and AIG which have been among the largest sellers of default protection. These firms are very likely to bow to government wishes. What we don't know is the extent of counterparty exposure among firms beholden to the government.
Does this mean that small bondholders are screwed? It depends on one's definition of screwed. Small bondholders could be forced to accept poor levels of compensation, but at least any shares received as compensation will be new shares of a (hopefully) reformed GM as current shareholders are likely to be completely wiped out. The sad fact here is that in bankruptcies in which the government is a senior claimant (which it is here), Uncle Sam does not want to run the company in question. He only wants to be made as close to whole as possible. GM bondholders offered Uncle Sam such a deal, but were rebuffed. This is not a big deal to institutional bondholders, but really hurts the small investors.
Think the government can successfully run a business? See Amtrak.
Another great plan engineered by the U.S. government was the renegotiation and forgiveness of mortgage principal balances. I have not been a fan of such schemes as it defies contract law when the loans in question have been securitized and, in most cases, it does nothing more than delay the inevitable. Today's Wall Street Journal reports just that. Residential MBS spreads have been widening recently in spite of government efforts to support that market.
The government cannot seem to get their TALF and PPIP programs of the ground. Prospective participants want to buy assets at levels which make sense even without cheap government leverage (PIMCO has said specifically that) and are concerned that by accepting cheap government leverage, the government will want to exercise influence over the running of the companies in question, specifically setting compensation levels.
Thus far, there seems to be little benefit when investing along side the government. In fact, doing so could have negative consequences.
KeyCorp announced that it will offer trust preferred holders the opportunity to exchange their preferreds shares for common equity. Here is a link to the S-4 filing:
https://www.snl.com/irweblinkx/doc.aspx?IID=100334&DID=9566015
Bank of America announced that it will offer an exchange for privately-held preferred shares. No publicly-traded preferreds are part of the exchange.
This is something that fixed income investors may want to consider telling the government. In fact, some have been telling the government just that by deliberately avoiding investing in companies which could attract government interest. Such companies include TARP banks which may not be able (or permitted) to bay back TARP funds in the near future and companies with union workforces. The mishandling of GSE preferreds and the ill treatment afforded Chrysler senior secured creditors and GM bondholders have investors running for the hills when the government comes calling.
As predicted, GM bondholders wanted nothing to do with a bond for equity exchange which would have left them with a lilliputian 10% ownership of the company at the very subordinate equity level of the capital structure. As I have reported previously, large institutional bondholders are hedged to varying degrees with credit default swaps. This will result in substantial recovery for said bondholders. However, small bondholders may not fair so well.
When CDS contracts are settled in the traditional fashion. The seller of default protection pays the buyer of protection par (100 cents on the dollar) for the number of bonds insured. The buyer of protection then surrenders his or her bonds to the seller of protection who will seek compensation in bankruptcy. The result is that that the current bondholders may not be the parties negotiating in court. It could be companies such as TARP banks and AIG which have been among the largest sellers of default protection. These firms are very likely to bow to government wishes. What we don't know is the extent of counterparty exposure among firms beholden to the government.
Does this mean that small bondholders are screwed? It depends on one's definition of screwed. Small bondholders could be forced to accept poor levels of compensation, but at least any shares received as compensation will be new shares of a (hopefully) reformed GM as current shareholders are likely to be completely wiped out. The sad fact here is that in bankruptcies in which the government is a senior claimant (which it is here), Uncle Sam does not want to run the company in question. He only wants to be made as close to whole as possible. GM bondholders offered Uncle Sam such a deal, but were rebuffed. This is not a big deal to institutional bondholders, but really hurts the small investors.
Think the government can successfully run a business? See Amtrak.
Another great plan engineered by the U.S. government was the renegotiation and forgiveness of mortgage principal balances. I have not been a fan of such schemes as it defies contract law when the loans in question have been securitized and, in most cases, it does nothing more than delay the inevitable. Today's Wall Street Journal reports just that. Residential MBS spreads have been widening recently in spite of government efforts to support that market.
The government cannot seem to get their TALF and PPIP programs of the ground. Prospective participants want to buy assets at levels which make sense even without cheap government leverage (PIMCO has said specifically that) and are concerned that by accepting cheap government leverage, the government will want to exercise influence over the running of the companies in question, specifically setting compensation levels.
Thus far, there seems to be little benefit when investing along side the government. In fact, doing so could have negative consequences.
KeyCorp announced that it will offer trust preferred holders the opportunity to exchange their preferreds shares for common equity. Here is a link to the S-4 filing:
https://www.snl.com/irweblinkx/doc.aspx?IID=100334&DID=9566015
Bank of America announced that it will offer an exchange for privately-held preferred shares. No publicly-traded preferreds are part of the exchange.
Think that banks toxic assets may be worth par if held to "maturity"? Here are mortgage delinquency data from the FDIC:
2 comments:
whaaa..whaaaa.whaaaaaa...stop cryin' and git to work!
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