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Future of GMAC’s SmartNotes Holders!
By Amarendra Bhushan for CEOWORLD Magazine Updated:December 1, 2008
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GMAC LLC, the financing unit of General Motors Corp., is placing individual investors who loaned the company $14.6 billion behind institutions should the company file for bankruptcy.
Holders of so-called SmartNotes, which GMAC sold to individuals since 1996, aren’t included in the company’s $38 billion plan to exchange securities for new, discounted debt and preferred shares or cash, said Gina Proia, a spokeswoman for the Detroit-based company. SmartNotes investors “would be subordinated to the new notes, but they’re not being asked to take a principal discount,” she said.
SmartNotes show how perilous the bond market can be for private investors in times of financial stress. Individuals continued buying the debt as recently as last year, even as the world’s biggest carmaker reported losses. GMAC lost $7.9 billion over the past five quarters, and October was its worst month for sales since 1945. Moody’s Investors Service cut the company’s credit rating to C on Nov. 20, the lowest ranking.
Retail holders “could get virtually nothing if the company files for bankruptcy,” said Kathleen Shanley, an analyst at Chicago research firm Gimme Credit LLC, who recommends investors sell GMAC debt. “If the exchange goes through, they would be subordinate. That would not be a good position to be in.”
GMAC issued $25 billion of SmartNotes in $1,000 denominations during the past decade, using the proceeds to help pay for day-to-day operations. The notes, introduced by Chicago- based LaSalle Bank, allow individuals to be paid interest on an annual, semi-annual, quarterly or monthly basis. They include a “survivor’s option,” permitting spouses to sell the bonds back to the issuer if the owner dies. says bloomberg
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