"For Its Bonds To Have Value, GM Has To Generate Positive Earnings"

Such is the punchline of rating agency Egan-Jones, which did not drink the equity market kool aid today and reaffirmed it D rating on the company. With GM shares trading barely changed despite the company's announcement it is effectively bankrupt, it is curious what shareholders expect out of the upcoming in- (most likely) or out-of-court restructuring. Yes, there is always the possilbe hail mary option value that Kirk will come out of left field and offer to buy the company, pledging the MGM Mirage as collateral (again) but aside from that? If bonds take a 90 cents plus haircut the best equityholders can hope for is 1% warrants struck roughly 50,000% out of the post-reorg money. Here is what EJ had to say:

More pressure for bondholders to convert to equity as GM announces that they will not pay its $1B in interest payments due June 1st. For GM's bonds and shares to have any reasonable value, it has to generate positive operating earnings. (We doubt GM can generate operating earnings.) We look for a default where the bond holder gets primarily equity as the gov't tries to get concessions from every corner to keep GM running albeit as a much smaller company. GM has received $13.4B from the gov't and is expected to get another $5B shortly. GM must have a plan for auto sales closer to 9M units per year down from their current estimates of 10.5M units. Feb.sales were down 47% to the lowest level in 27 years. We affirm our "D" rating.

Zero Hedge is still curious about the potential for equitable subordination here with regard to the government tranche (loan or equity, Geithner and Chooch still haven't quite decided). Bondholders have been antagonized to such an extent that the odds of this kind of lawsuit in bankuprtcy court are getting bigger by the minute. Sphere: Related Content

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