As GM Plans Bond Payment Miss, Last Vestiges Of Hope Fade Away

Any investors with knowledge of General Motors Corp.'s (GM) bonds won't be shocked to learn that the company is going to miss a bond payment - the market has been forecasting a bankruptcy for months.

The concern is what the words "GM" and "default" together will do to investors who are not intimately aware that the auto giant's bonds are trading at less than 10 cents on the dollar.

"People don't understand where these bonds are trading; this is not new information," said Doug Forsyth, who manages about $3.75 billion in high yield and convertible bonds at Nicholas-Applegate Capital Management. "From a manager's perspective this is par for the course, but it makes headlines and spooks some people away."

To be sure, as Forsyth pointed out, GM is a miniscule part of the high-yield market now. Most traders have long written the company off, and articles about a prospective bankruptcy have been part of the news flow about the company since at least last year when the company appealed to the federal government for help.

Large GM bondholders were already aware that the company was planning on missing a big interest payment, according to a person familiar with the thinking of the ad-hoc committee that holds just under half of the company's bonds.

The person said they knew the June 1 government deadline for a restructuring plan wasn't a coincidence; the government didn't want the struggling company to spend $1 billion to keep servicing its debt.

Much of the market has long been following that line of thinking. Portfolio manager Greg Hopper of the Artio Global High Income Fund said that at this point most of the holders of auto-related debt are professional distressed investors and know what they're getting into.

Still many of GM's bonds traded down Wednesday afternoon, implying there were still some hopefuls out there. The company's $3 billion 8.375% bond offering due 2033 recently changed hands at 9.1 cents on the dollar, according to online trading platform MarketAxess, down 0.81 cents for the day on 10 trades.

As much as 20% of GM's $28 billion in bonds are held by small investors who haven't already read the writing on the wall. Many of them won't have been able to trade out of their bonds and will only take losses if the company defaults.

"If it does default I think you're going to see a profound reorientation in Middle America," said Richard Peterson, managing director of hedge fund MarketPsy Capital LLC. "It's going to have ripples throughout the investing public."

GM Chief Financial Officer Ray Young - who told reporters that the auto maker had no plans to meet the June 1 interest payment - may have done investors a favor by reminding everyone of the harsh reality ahead.

"People should be getting the sleep out of their eyes and seeing it's over," said Marilyn Cohen, president of retail bond investment manager Envision Capital. "I would imagine they're going to file any minute...Not making a payment - it's going to show them that this time, they mean it."

Next week will be the one to watch to see how the projected GM default will play out. GM's Young said the company will launch a debt-for-equity exchange in coming days - it has to do so by May 1 to avoid a filing. Investors will also be watching how Chrysler's restructuring deadline will be handled by the government, which is widely seen as a dry run for GM.

"This is all to get GM, which is the real big fish, lined up and primed, hopefully to make a bankruptcy filing as clean and expedient as possible," said Kip Penniman, GM debt analyst at KDP Advisor.

-By Andrew Edwards, Dow Jones Newswires; 210-938-5973; [e-mail]