Retired Chrysler LLC project manager Clifford St. Pierre and his wife Patricia bought $200,000 in General Motors Corp. notes three years ago, thinking it was a sound way to finance their retirement.
The 10-year securities carry a 7.2 percent interest rate and what they viewed as an almost bulletproof yearly payout of more than $14,000. "We made a decision to buy bonds in the largest manufacturer in the world," he said from his home on Grosse Ile, an island in the Detroit River about 25 miles south of GM's headquarters.
Their next semiannual payment is due in July, but St. Pierre, 70, now spends his free time scouring news reports, trying to figure out whether that check will ever be in the mail.
His biggest fear is that he'll lose most — if not all — of his original investment if a debt-for-equity swap for GM shares that's being talked about happens.
A group of institutional investors that includes Fidelity and John Hancock formed a committee to negotiate terms of such an exchange with GM, which is seeking to slash its debt and make other cuts to stave off bankruptcy and receive more federal aid.
The parties haven't held formal talks since late March, and in the meantime the value of the unsecured notes similar to those bought by the St. Pierres continue to slide. They now trade on the secondary market for about 9 cents on the dollar, down from close to 90 cents a year ago.
Although large investors hold the bulk of GM's $28 billion of unsecured debt, about $5 billion to $6 billion of that debt is held by individuals like the St. Pierres who are finding that they have little say in, or knowledge of, the negotiations.
"I have to believe the committee is doing what they can to get the best possible deal," St. Pierre said. But he worries that the larger investors will eventually agree to accept a big haircut and move on, leaving him and his wife facing the prospect of getting only pennies on the dollar — or just equity in a new GM, as the government's auto task force has suggested. That would wipe out 80 percent of their total retirement savings.
GM has been surviving on $15.4 billion in loans from the Treasury Department and would get more if it can satisfy the government with its restructuring efforts. Although GM also needs concessions from the United Auto Workers union to qualify for the money, President Barack Obama has said further government support depends on GM substantially cutting its debt load.
If bondholders reject demands from GM and the government, the Detroit automaker will likely seek Chapter 11 bankruptcy protection that would leave it up to a bankruptcy judge to determine the terms of extinguishing GM's debt. St. Pierre and other individual bondholders would be forced to go along with whatever the court deems appropriate to keep GM afloat.
"It's very possible they would wind up with just a fraction of the face amount," said Richard Hilgert, president of Automotive Financial Research LLC. "The court might be willing to throw a bone to those lower on the recovery waterfall, just to make the process move a bit more quickly."
The government is demanding GM cut more than two-thirds of its unsecured debt, and it's reportedly pressuring GM to offer bondholders only equity in the revamped company. In that case, their recovery would depend on the automaker's stock performance.
"There's no carrot, no real attractive carrot to get individual bondholders, or even institutional ones to take it," said Kip Penniman, managing director for KDP Investment Advisers. "There's going to be a substantial number of holdouts that say 'no' without a meaningful incentive."
GM has said it is preparing a public exchange offer that will finally tell every bondholder — large and small — what the company is offering. The details will have to be released soon if GM wants to retire its debt before the government's June 1 restructuring deadline.
If St. Pierre participates in such an exchange, he likely would get at least a small part of his investment back. If he rejects the offer, and if a bankruptcy court doesn't force him to exchange his bonds, he could hold them until they mature in 2011 in the hopes of getting some or all of his principal back. Such an outcome, however, is unlikely.
St. Pierre said he doesn't know what the better option would be right now, as neither option would be enough money to cover a medical emergency or leave to his three adult daughters and grandson.
Overall he wants the task force to "lighten up" on squeezing concessions out of bondholders, and he's called the offices of U.S. Sens. Debbie Stabenow, D-Mich. and Carl Levin, D-Mich., to urge them to pressure the auto task force to consider the plight of small investors.
Stabenow, at a recent event in Detroit, said she's addressed the issue with chairman Steven Rattner and others on the auto task force.
"I am constantly reminding them about families and retirees in Michigan, and how this affects people differently than it does the bondholders on Wall Street," she said.