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Anyone understand what's going on with GMAC?

I bought GMAC bonds about 5 or 6 (?) years ago for about 85¢ on the dollar when they were still rated investment grade by Moody's and S&P. I was planning to hold them to maturity (2031, I think) or until they were called-away.

It looks like they are trying to figure out a scheme to throw the bond holders (me) under the bus to save the equity holders (that would be Cerberus Capital Management LP.) How is that legal? I knew there was some risk of default, but thought any default would trigger a bankruptcy that would wipe out the equity holders first.

I wish I had known I could just go to my mortgage holder and unilaterally adjust the terms to reduce the loan principal. (best analogy I can think of)

Can someone 'splain it to me, Lucy? I really am confused by this "debt swap" stuff I'm reading about. So far they have not missed an interest payment.

Thanks, Bob

Reply to
zxcvbob
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My understanding is that a default does not automatically trigger a bankruptcy (which is a more of a legal proceeding than a financial state); rather it empowers creditors to force a bankruptcy. Involuntary bankruptcy is often not in the best interest of the creditors, as they would be better off with larger, albeit late, payments, than with pennies on the dollar. In this situation, creditor and owner interests align.

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I believe that debtors owe no duty to bond holders other than to remain current in payments. If a debtor's actions taken to save a company reduce the market value of their debt, so be it. Until a company becomes insolvent, there appears to be no special duty owed to creditors. Reasonable people may differ on when a fiduciary duty to creditors attaches (near insolvency, once insolvent, deep into the muck, etc.), but there is a line that needs to be crossed before debtors have any special duty toward their creditors.
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The deal does not appear to be unilateral. The article you cited mentions an _offer_ to exchange debt. You are not compelled to accept the offer.

Here's a Moody's paper on distressed debt exchanges, including a definition, a discussion of how they can be structured, why creditors are inclined to accept these exchanges, voluntary vs. involuntary exchanges, etc.

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Mark Freeland snipped-for-privacy@nyc.rr.com

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Mark Freeland

Thanks, that helps a lot.

Bob

Reply to
zxcvbob

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