Originally Posted by Zathras
According the CNBC, the GM news release indicates the current common stock holders will own about 1% of the company.
With that level of dilution, I am amazed that the GM common stock is up about 25% right now.
Am I missing something?
Markets trade on expectations. Even with bad news stocks can go up if people were expecting worse news.
In GM's case, it looks to me like a head fake. There is a pretty close to 0% probability that bondholders accept this proposal. The joke is that it requires 90% bondholder approval, but bondholders have two very good reasons not to play along. The most obvious is that they have a good shot at getting a better deal in bankruptcy. They currently have the same senior unsecured claim as the unions, but the unions are getting much more for smaller concessions. Why would anyone agree to that? Secondly, because bond holders who go along with the exchange are swapping into a more junior position in the capital structure (in to equity) those who don't exchange actually make out better than those who do. That is non-participating bond holders get to keep 100% of their senior unsecured claim in a significantly less leveraged entity while those who exchange get a fraction of their claim paid as a small slice of equity. Again, why would anyone agree to that?
My guess is that everyone knows this exchange is DOA but they're going ahead with it so when GM files the administration and the unions can blame it on the bondholders.