Are GM Bonds really cheap?
The number of folks who are writing about their interest (or putting their money where their mouth is) regarding GM bonds seems to be rising over the past few months.
I just read Martin Whitman's latest letter to Third Avenue Value Fund shareholders where he explains his rationale for opening a small position in some senior unsecured GM debt. It's worth reading yourself, as all of his letters are worth reading, but his basic rationale is that the unsecured debt -- trading at less than 60% of face value with about a 15% yield when he first bought in -- has very little downside.
No surprise in that assessment, since "safe and cheap" is the core investing principle of Third Avenue. He goes on to say that the senior unsecured debt has some extra protection because of GMs stable of profitable divisions and investments (to go along with the very unprofitable ones) and what he perceives as a national interest in keeping the GM common stock from becoming completely worthless in whatever kind of reorganization GM has to undergo (either voluntary or chapter 11). If the common stock is to be left with any value in a chapter 11 proceeding, everything higher on the food chain will have to be compensated significantly more ... including the unsecured debt.
Whitman does state that he certainly sees dramatic operating risk in GM -- he thinks any reorganization is likely to be relatively low risk for bondholders, it appears, but also thinks that there will be significant risk for holders of GM common stock coming out of a reorganization (and if GM files for bankruptcy, the bondholders will likely end up with common stock of the reorganized company, not with cash). Reorganization won't fix their product lineup, but it will give them a chance to breathe without their legacy costs hanging over their heads and preventing the company from making a profit. What happens after that is anyone's guess and has a lot more to do with management and the vicissitudes of the marketplace than with balance sheets or cash flow.
Every time I read one of Whitman's letters, I regret that I don't have any money invested in his flagship fund. I do have holdings in two other Third Avene funds that follow the same strategy in particular sectors -- International Value and Real Estate -- and these have been spectaculary successful investments, with excellent managers in their own right. But the Value Fund that Marty runs is, I'd say, the closest thing to a top notch hedge fund (with much lower fees) that most of us small investors have available to us. His letters should be just as much required reading for anyone interested in value investing as Warren Buffett's.
GM debt has come across my radar screen a few other times as well, which is saying something because I'm not generally interested in investing in bonds of any sort at this point in my investing life.
Random Roger wrote about it last month and included a nice table from a January Barron's article listing a few of the widely traded bonds that you can get on the NYSE (GM has a lot of NYSE traded debt, with par values of $25, that are trading between $16 and the low $20s -- I don't know whether Third Avenue is invested in these issues or in others). Older articles from last summer touched on this, too, with a Washington Post article citing another bull on GM debt after a big drop, and lots of discussion on the other side, too -- including this blog post from Controlled Greed.
So is it really worth it to dabble in these junk bonds of a company that may well go through bankruptcy? I don't know, but I'm starting to think that if I want to do so I should make a move soon, given the potentially positive news coming out of GMs labor talks following the Delphi deal today. If GM stock trends higher, the bonds are soon going to stop providing the nice 10-15% yields that most of these issues are getting (and in some cases yields to maturity or call could be dramatically improved on the convertible issues if GM stock does return significantly to favor).
I'll be looking them over as I can over the next couple weeks or so -- this is clearly not an area where a little investor is going to have the leverage that the big houses or even Third Avenue can have in a targeted debt investment, but the large array of available exchange-traded GM bonds makes this, at least, an interesting exercise ... especially if we accept Whitman's argument that a solid return might be achieved on these types of investments even in a Chapter 11 filing.
The NYSE tickers for a few of the big $25 par value issues, for anyone interested in researching these folks, are GMS, GXM, GBM, GKM and GPM, maturities are out anywhere from 25 to nearly 40 years, though some can be called or put or converted at various points.
I still find it hard to look past GMs wounds that are gushing cash everywhere, none of which seem to be all that close to healing, but maybe I'm not seeing the big picture. Let me know if you have any thoughts on these bonds or on GM as a whole -- I definitely wouldn't buy the stock, does that make buying the bonds a dumb idea?
I just read Martin Whitman's latest letter to Third Avenue Value Fund shareholders where he explains his rationale for opening a small position in some senior unsecured GM debt. It's worth reading yourself, as all of his letters are worth reading, but his basic rationale is that the unsecured debt -- trading at less than 60% of face value with about a 15% yield when he first bought in -- has very little downside.
No surprise in that assessment, since "safe and cheap" is the core investing principle of Third Avenue. He goes on to say that the senior unsecured debt has some extra protection because of GMs stable of profitable divisions and investments (to go along with the very unprofitable ones) and what he perceives as a national interest in keeping the GM common stock from becoming completely worthless in whatever kind of reorganization GM has to undergo (either voluntary or chapter 11). If the common stock is to be left with any value in a chapter 11 proceeding, everything higher on the food chain will have to be compensated significantly more ... including the unsecured debt.
Whitman does state that he certainly sees dramatic operating risk in GM -- he thinks any reorganization is likely to be relatively low risk for bondholders, it appears, but also thinks that there will be significant risk for holders of GM common stock coming out of a reorganization (and if GM files for bankruptcy, the bondholders will likely end up with common stock of the reorganized company, not with cash). Reorganization won't fix their product lineup, but it will give them a chance to breathe without their legacy costs hanging over their heads and preventing the company from making a profit. What happens after that is anyone's guess and has a lot more to do with management and the vicissitudes of the marketplace than with balance sheets or cash flow.
Every time I read one of Whitman's letters, I regret that I don't have any money invested in his flagship fund. I do have holdings in two other Third Avene funds that follow the same strategy in particular sectors -- International Value and Real Estate -- and these have been spectaculary successful investments, with excellent managers in their own right. But the Value Fund that Marty runs is, I'd say, the closest thing to a top notch hedge fund (with much lower fees) that most of us small investors have available to us. His letters should be just as much required reading for anyone interested in value investing as Warren Buffett's.
GM debt has come across my radar screen a few other times as well, which is saying something because I'm not generally interested in investing in bonds of any sort at this point in my investing life.
Random Roger wrote about it last month and included a nice table from a January Barron's article listing a few of the widely traded bonds that you can get on the NYSE (GM has a lot of NYSE traded debt, with par values of $25, that are trading between $16 and the low $20s -- I don't know whether Third Avenue is invested in these issues or in others). Older articles from last summer touched on this, too, with a Washington Post article citing another bull on GM debt after a big drop, and lots of discussion on the other side, too -- including this blog post from Controlled Greed.
So is it really worth it to dabble in these junk bonds of a company that may well go through bankruptcy? I don't know, but I'm starting to think that if I want to do so I should make a move soon, given the potentially positive news coming out of GMs labor talks following the Delphi deal today. If GM stock trends higher, the bonds are soon going to stop providing the nice 10-15% yields that most of these issues are getting (and in some cases yields to maturity or call could be dramatically improved on the convertible issues if GM stock does return significantly to favor).
I'll be looking them over as I can over the next couple weeks or so -- this is clearly not an area where a little investor is going to have the leverage that the big houses or even Third Avenue can have in a targeted debt investment, but the large array of available exchange-traded GM bonds makes this, at least, an interesting exercise ... especially if we accept Whitman's argument that a solid return might be achieved on these types of investments even in a Chapter 11 filing.
The NYSE tickers for a few of the big $25 par value issues, for anyone interested in researching these folks, are GMS, GXM, GBM, GKM and GPM, maturities are out anywhere from 25 to nearly 40 years, though some can be called or put or converted at various points.
I still find it hard to look past GMs wounds that are gushing cash everywhere, none of which seem to be all that close to healing, but maybe I'm not seeing the big picture. Let me know if you have any thoughts on these bonds or on GM as a whole -- I definitely wouldn't buy the stock, does that make buying the bonds a dumb idea?
Labels: GM
This article posted by One Guy @ 3/22/2006 08:05:00 PM 0 comments
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