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Bond Prices Suggest GM Stock May Be Overvalued

Wall Street Journal - Aug 20, 2010

Investors thinking about getting in on General Motors' initial public offering may want to check the bond market before buying.

Although the company hasn't specified the price or size of the offering, GM's (GM) IPO is expected to raise about $16 billion, making it the second-largest in U.S. history. It's not clear how the offering will value the auto giant, but there are already clues in the bond market.

There are billions of dollars of bonds left over from GM's previous incarnation. Motors Liquidation Co., the surviving entity, listed $32.2 billion of liabilities at the end of June, including more than $28 billion of unsecured bond debt.

This debt still trades a lot. The bellwether issue is a bond that GM sold in 2003. It matures in 2033 and initially yielded 8.375%. This bond is currently trading at about 34 cents on the dollar.

Owners of GM's old bonds will get 10% of the new equity, plus warrants to buy another 15%. Factoring in things like dilution, bond holders will probably end up with about 20% of the new equity in GM after the IPO, according to Shelly Lombard, an analyst at independent fixed-income research firm Gimme Credit.

Read Full Article from Wall Street Journal

- Posted: 2010-08-20 22:15:10

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