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After Stiffing Bondholders, GM Issues New Debt

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“Fool me once, shame on you; fool me twice shame on me.” That is a cliché that investors should keep in mind if they are considering buying into General Motors’ latest debt offering. In fact, holders of GM common stock should also assess the growing similarity that New GM has with the bankrupted Old GM.

GM announced last week that it will be offering an estimated $2 billion of unsecured debt to help prop up underfunded pensions with additional proceeds used for general business purposes. The move follows a contradictory continuing dialogue that proclaims the company is so cash rich that it can afford to buy back billions of dollars of common shares as it doles out $11,000 bonuses to UAW workers. GM share performance belies the notion that the company is firing on all cylinders.

Since GM’s public offering in late 2010, shares are down over 15% while the S&P 500 index rose about 60%. That’s a huge 75% underperformance. Recent data is almost as ugly. Over the past 1 year span, GM shares are down approximately 23% while the S&P 500 is down about 9%. This during a time when auto sales are at record levels.

According to GM’s latest SEC filing, the company now has about $23 billion in cash, equivalents and marketable securities on its balance sheet. That compares to approximately $28 billion at the end of 2014. Long term debt grew over the year from roughly $47 billion to the current neighborhood of $63 billion, the majority of which goes to fund GM’s lending operations. Pensions were underfunded by about $21 billion.

Practically all of GM Automotive debt (about $8 billion) is considered unsecured as is about $24 billion of GM Financial debt. It is important for potential investors to realize that it was the unsecured GM bondholders who got the shaft when the Obama Administration orchestrated the 2009 bankruptcy process that saw the politically-favored UAW have its interests protected. The UAW continues to have a large investment stake (about $5 billion worth) in GM shares.

GM’s ever-struggling share price is the best indicator of just how healthy the company really is. The implication is that GM stock is a classic “value trap” boasting a high dividend yield along with low P/E ratios as stock performance continually underperforms broader markets. Despite the fact that auto sales are at historical highs, cash flow at GM is weakening the balance sheet. This at a time when the company should be looking to preserve cash to weather the inevitable downturn which will eventually hit the auto industry.

The above facts are obvious to savvy professional money managers. That is why GM share price continually languishes. The “smart money” is buying neither the GM management’s hype nor the shares. It is the little guy that gets burnt when they invest in GM based on the seemingly rosy financial fundamentals. These are the same Mom and Pop type investors that GM targeted when they offered unsecured debt via public stock exchanges in $25 denominations. Old GM could not get enough money to fund their operations from institutional debt so they tapped into less sophisticated purses and wallets to pay for UAW obligations.

There was no indication that GM will again be offering debt in the same predatory manner in which Old GM did. But given the present GM management’s propensity to spend money faster than it is earned while at the same time raising debt levels, it will only be a matter of time before history repeats itself.

The auto industry is both highly cyclical and highly competitive. GM’s management team does not seem to have what it takes to be one of the survivors when an eventual shake out occurs. Hopefully taxpayers and unsuspecting investors will not again pay the price for GM to take a second trip through bankruptcy court.

Mark Modica is an NLPC Associate Fellow.


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