| NEW YORK
NEW YORK Scores of companies are being punished in the bond market as the Obama administration's policies on General Motors and Chrysler LLC create new risks for creditors, a veteran bond strategist says.
As GM teeters toward a bankruptcy filing and Chrysler attempts to restructure in bankruptcy court, the Obama administration is offering most of the recovery value of those companies to "a favored political class, in this case the United Auto Workers, leaving creditors with very slender debt recoveries," Christopher Garman, founder of Garman Research in Orinda, California, said in a report released late on Friday.
President Barack Obama and a more tightly Democratic-controlled Congress were sworn in January.
To gauge whether those cases have made debtholders wary of other companies with so-called favored political classes, Garman compared spreads, or bonds' extra yields over U.S. Treasury yields, for companies with collective bargaining agreements with the high-yield bond market as a whole.
While the two performed in line with each other since 2003, they diverged sharply in February, with spreads on companies with organized labor gapping nearly 11 percentage points higher than the market as a whole, according to Garman's research.
The gap in spreads has persisted and was about 9 percentage points as of mid-May, Garman said. The gap appeared shortly after strategists reported signs that bondholder negotiations with GM were unraveling.
While strategists had originally expected GM's bondholders to recover as much as 50 cents on the dollar in a bankruptcy, recovery prospects began dimming as the United Auto Workers pressed for more favorable treatment.
CONTRACT RIGHTS AT STAKE
GM eventually offered bondholders a 10 percent stake in the company for $27 billion in debt, while offering the union a 39 percent stake in the company and $10 billion in cash in exchange for $20 billion in health-care trust claims.
A new union agreement announced on Tuesday, however, will give the union 17.5 percent equity for its health care claims, leaving the rest for other creditors and the U.S. government.
The union will also get $2.5 billion in notes and $6.5 billion in preferred shares.
Bondholders had tagged the earlier offer as a politically motivated deal dictated by the Obama administration to protect the unions, which campaigned for Obama.
A spokesman for the UAW was not immediately available for comment.
Apart from automakers, sectors heavily influenced by collective bargaining agreements include supermarkets, construction, wired telecommunications, delivery and healthcare, Garman found. Gaming, select media and publishing companies and paper and textile companies also made his list.
For years in the past, "bondholders were more than happy to hold on to the debt of these companies," Garman said in an interview. "That's come to a pretty sharp end over the past six months."
"It really does get at the issue of how strong are the contractual rights of creditors," Garman added.
His study stripped out bonds of GM, Ford Motor Co, Harrah's Entertainment and MGM Mirage to eliminate the influence of those large borrowers, all of which have unique problems.
Garman's findings echo warnings from other bondholders that unionized companies will have trouble attracting cash in the bond market if the bankruptcies of GM and Chrysler give creditors substantially smaller payouts than they traditionally received.
"There are a number of creditors that are not happy with the preferential treatment afforded to the United Auto Workers at the seeming expense of creditors," said John Lonski, chief economist for Moody's Investors Service.
GM's debt exchange offer, which expires at midnight on Tuesday, has been met with a cool response from bondholders, with only a percentage in the low single-digits agreeing to participate, sources familiar with the process said on Tuesday. GM has said it will file for bankruptcy if bondholders do not agree to the exchange.
The GM and Chrysler bankruptcies may be unique situations in a long-politicized industry, but they also could mark "a new period of uncertainty for the debt recoveries of favored-political-class companies," Garman said in his report.