No Runny Eggs

Almost completely lost in the shuffle of Government Motors’ IPO is news that GM and the US Treasury agreed to allow GM to buy back the $2.1 billion in preferred stock owned by the Treasury 4 years early at a 2% premium over the liquidation price. That is to be done shortly after GM sells $4.35 billion in new-issue preferred stock to be traded publicly.

Back when the Treasury set up Government Motors as a post-bankruptcy entity, in addition to the 61% stake it took in the common stock of the company, it also took $2.1 billion in perpetual prefered stock that paid an all-but-mandatory 9% annual dividend (well, GM could not declare the dividend, but it would have to make good before it either paid a dividend on any other class of stock or bought back the preferred stock). The Canadian government took a smaller piece of this preferred stock, and the UAW took the lion’s share to help fund the VEBA. One of the restrictions the Treasury put on GM was that it could not buy back this stock before the end of 2014.

Suddenly, on October 27, just a couple weeks before the IPO, GM and the Treasury agreed that, instead of forcing GM to wait until the end of 2014 to buy back the $2.1 billion in preferred stock and pay out $802 million in dividends between now and then, they would let GM get out of it now at a 2% premium on that $2.1 billion price (or a $41 million premium). There are two explanations I can think of for why the Treasury would give up an all-but-guaranteed $755 million over the next 4 years for $41 million now:

• By eliminating its first claim on $189 million/year from GM, it believes it will get more from common stock sales than the $761 million it’s giving up from the preferred stock. One of the big knocks on GM is that it is indeed Government Motors. By no longer demanding $189 million per year before anybody else not named government or the UAW gets a taste of the profits (which is what a dividend on common stock is) and demonstrating that once the last of the common stock is out of the Treasury, the government is out of GM, the hope is that investors will actually believe that it isn’t Government Motors. Given that the IPO price jumped from $25/share to $33/share, it isn’t an unreasonable expectation.
• The Treasury isn’t hopeful that GM will survive for very long. Even though preferred stock is senior to common stock, and indeed the government/UAW issue preferred stock is senior to the private-issue preferred stock that should be hitting the open market in a few days, it is still junior to all debt. Tom Blumer noted that dealer inventories have been “gamed” in advance of the IPO to make GM appear to be more profitable than it is. Under this line of thinking, getting $2.14 billion now is better than perhaps not getting even $802 million (much less not getting $2.9 billion) over the next 4 years.

Okay, folks – have at it. Which is it, one, the other, both, or did I just bore the living hell out of you?

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