Q. I have a GMAC bond that is supposed to mature in October 2006. I have been getting the interest every quarter. Do you think that I will have any problems getting the money at that time?
S.L., Skokie
A. The fact that you have been receiving interest every quarter means nothing. What matters is the future.
The key will be whether GMAC is forced to go into bankruptcy because parent General Motors Corp. winds up filing. And GM has insisted it has no plan to file for Chapter 11 protection.
But analysts say GM may get to the point where bankruptcy is the reasonable way to restructure and get out from under its tremendous pension costs. If it does that, GMAC could get pulled into the fray, even though the company is on much stronger financial footing.
If GM files for Chapter 11, it will happen without warning. And once a firm goes into bankruptcy court, it’s usually too late for bondholders. Typically, people with bonds get back significantly less than they originally invested.
The fact that your bonds mature within 10 months puts you in a safer zone than people with bonds maturing years into the future.
GM is trying options to prop up its finances, such as selling a majority of its interest in GMAC. The negotiations on that deal may give you some breathing room. And if they work out, and GMAC is sold to a strong entity such as a major bank, the value of your bonds likely would increase.
Q. I am holding GM bonds, and my broker told me not to worry about them because GM has plenty of cash. Do you agree?
H.M., Naples, Fla.
A. Your broker is partially right. GM does have a lot of cash–about $19 billion. And having a lot of cash to pay the bills is better than getting tight on cash.
But that still doesn’t mean that the company won’t file for Chapter 11. Chicago bankruptcy attorney Harley Goldstein of Freeborn & Peters LLP notes that companies that have major financial issues hanging over them sometimes file while they have plenty of cash. The cash gives them flexibility to restructure successfully.
If a company depletes too much cash before filing for Chapter 11, it loses some of the flexibility it needs to steer itself onto a better course in bankruptcy court, Goldstein said. Companies that wait too long and let their cash melt away can end up unable to come out of bankruptcy.
Q. I am retired and have GM preferred stock. What will happen to it if GM goes into bankruptcy?
J.G., Studio City, Calif.
A. Typically, people who own either preferred or common stock end up with nothing when companies go into Chapter 11, Goldstein said.
That’s why people must be cautious when they try to pick up a little more interest by buying preferred stock rather than bonds.
In Chapter 11, everyone with a financial stake tries to recover their money. There is a pecking order.
Stockholders usually stand at the end of the line. The presumption is that they knew when they bought stock there were no guarantees they’d ever get anything. Lenders, on the other hand, have been given promises.
Q. I own Ford preferred stock, and it has fallen more than 30 percent in about three months. Is Ford in as precarious shape as GM?
B.D., Baltimore
A. Ford Motor Co. is not as precarious as GM, but it is not in good shape either. You can tell by looking at bond ratings from firms such as Standard & Poor’s. Ford and GM have ratings below investment grade.
But Ford’s rating, at BB+, is almost two steps higher than GM’s at B. In other words, GM is considered a greater risk to go into Chapter 11 and fail to pay bondholders than Ford.
S&P analyst Bob Schultz said both automakers are weak because of their pension responsibilities and dependence on sport-utility vehicles. But GM is using up cash, while Ford still is generating positive cash flow.
When companies are burning through cash, they must reverse the trend by cutting costs or increasing sales, or they eventually arrive at a point where they can’t pay the bills.
Although Ford’s rating is better than GM’s, S&P has indicated it is reviewing the rating and may reduce it. If it does, Ford preferred stock likely will fall more.
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Contact Gail MarksJarvis at gmarksjarvis@tribune.com or leave a message at 312-222-4264.
