Pretoria - General Motors Corporation (GM) is already insolvent and a chapter 11 bankruptcy filing is inevitable. That was the warning from the bond market in the US on Friday last week when the bonds of GM tumbled to trade at only a fraction of their face value. This is a sure sign of a pending chapter 11 bankruptcy. GM has three outstanding corporate bonds. The 8.375% coupon bond is due in 2033, the 7.7% coupon is due 2016, and the 8.25% bond is due in 2023. The prices of all these bonds slumped to a similar value of 11c in the dollar on Friday. When there's a similar price for bonds with different coupons and maturities, it's normally a sure sign of a pending Chapter 11 bankruptcy application. Meanwhile at Ford things are not looking much better. The price of its 7.45% bond which matures in 2031 dropped to 17c on the dollar. Let me explain. A bond with a coupon of 8.75% promises to pay the bearer $8.75 per annum for every $100 nominal value held. But $100 nominal was trading at only $11 on Friday. That is an effective running yield of $8.75/11 x100 or 79.5% that an investor can earn on a bond of GM. Seen from a different perspective, if GM wanted to borrow new money from the private sector, it would have to offer investors an interest rate of 80% or more. That will cripple any company and will guarantee its eventual demise. GM, America's largest manufacturing concern, is insolvent. The possible $5bn or $10bn of emergency funding from the White House is going to be exactly that. Emergency funding that is going to postpone the inevitable by a few hours, perhaps days but not many weeks. The bond market is warning than GM is worth 11c in the dollar. Wall Street, where the shares are still trading at $4 apiece and values this massive manufacturer at $2.4bn is wrong. Bonds rank ahead of ordinary shares in liquidation, and the bonds are valued at only 11c in the dollar. The shares of GM are worthless. If you do believe like some of the executives at GM that some sort of a long term miracle is about to happen, buy the GM bonds at 11c in the dollar for a running yield of 80% instead of the ordinary shares that will not pay a dividend again in your life time, even if you are a youngster. Bill gates, founder of Microsoft, recently said that it is wrong for a government to invest in an industry from which the private sector has shied away. The bond prices and yields tell us that the US auto industry is such a sector. ->
http://www.fin24.com/articles/default/display_article.aspx?ArticleId=1518-2387-2409_2442189&IsColumn...
