Thursday, May 28, 2009

Unionized Companies Punished in Bond Market

NEW YORK (Reuters) - 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.

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.

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."

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.

HT: Mike LaFaive


At 5/28/2009 9:19 AM, Blogger KauaiMark said...

"...trouble attracting cash in the bond market if the bankruptcies of GM and Chrysler give creditors substantially smaller payouts than they traditionally received."

It's called the law of "expected consequences" by anyone with brains

At 5/28/2009 11:03 AM, Blogger fboness said...

Does anyone see a similar effect in the bonds of unionized city/state governments?

At 5/28/2009 12:35 PM, Anonymous Anonymous said...

Fortunately for these companies the US Government isn't scared about getting involved.

At 5/28/2009 1:01 PM, Anonymous Anonymous said...

The attack on property and contractual rights isn't limited to the bonds of unionized companies. The socialists in the Democart party and the Obama administration are busy destroying the mortgage backed securities market:

On Wednesday, President Obama signed the "Helping Families Save their Homes Act of 2009," giving banks and other servicers legal immunity from lawsuits alleging that they broke contracts with securities owners like Frey.For his part, Frey sees that as an unconstitutional abrogation of his contractual rights."The U.S. government is now putting a bounty on renegotiating loans and providing [servicers] safe harbor protection from lawsuits -- basically, telling servicers to ignore their contracts."If you can't tell me that's disturbing," he said, "welcome to Zimbabwe."LINKThis insanity will make it much more difficult to address the housing crisis and will negatively impact the future housing market.

At 5/28/2009 1:18 PM, Blogger Unknown said...

I loved reading that letter from Mr. Frank and his cronies. This whole thing has been fascinating to watch unfold and it's not over yet. I sincerely hope that Mr. Frey has the constitution (pun intended) to see this through to it's logical conclusion in the Supreme Court. If I were a betting man, I'd say he'll cave in to the pressure exerted by Mr. Frank and others who are just here to help us all out.

At 5/28/2009 6:21 PM, Blogger montestruc said...

They wanted, and got change. But it seems they do not consider the unintended consequences.

At 5/29/2009 6:11 AM, Anonymous Richard said...

Is there some article that explains how the secured creditors (Chrysler/GM)got diluted? I thought that in bankruptcy, the court would hear all initiatives (plans) and rule accordingly. The sense I have here is that everything has been determined ex ante and there is no recourse-- which I don't understand.

At 5/29/2009 9:48 AM, Anonymous Anonymous said...

Even more evidence - as if more were needed - of the government's assault on private property rights and the consequences:

Washington Mutual – by far the biggest bank confiscation in US history – happened during the AIG/Lehman week. It was confiscated despite being liquid and adequately capitalised at the time ...Washington Mutual was given to JP Morgan who did not need to honour all of WaMu’s debts. Debt holders – who would normally have expected to recover most or all of their investment were wiped out.After this – and until very recently – no major US bank could raise any debt without a government guarantee. After all – if the government could wipe you out why would you ever invest in low risk margin debt?The confiscation of Washington Mutual thus forced the entire system onto the government guarantee tit. The cost to taxpayers is thus potentially enormous....LINK

At 6/01/2009 2:25 AM, Blogger OBloodyHell said...

> It's called the law of "expected consequences" by anyone with brains

Well, that excludes the entire Obama administration, as well as 99% of all Democrats, doesn't it?

> I thought that in bankruptcy, the court would hear all initiatives (plans) and rule accordingly.

Richard, the Obama admin has played fast and loose with the rules. This should, indeed, play out in court with the UAW *and* Obama getting sharply rapped on the knuckles. Whether that happens or not will be... interesting, with some very... interesting (in the "Chinese" sense of the word) results, if not.

At 6/02/2009 10:09 PM, Anonymous Anonymous said...

Capital will leave the US and invest in emerging markets and other choices. Getting out of dollar denominated investments makes sense with huge government debt and no respect for contracts. When will inflation and US treasury bonds top 10%? Will it be when the debt hits $20 trillion? Unemployment will cross the 10% threshold first. Stagflation, high taxes and social unrest are coming. Will the dollar collapse completely?

My solution is to make the banks hold all that cash in reserve. End fractional reserve banking now. This will dampen inflation and prevent the banks from leveraging our futures again to reward management.


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