Seriously, no matter what happens (Ch 7, Ch 11, Prepack or not, even bridge loans) there will be such massive dilution. You can see that in the premiums being offered on the puts, why is everyone and their mother not on that side of the trade? No matter what happens, common is going to take a HUGE hit, the gvt is going to get some kind of equity in the deal, and the UAW will prob end up with 20Bil in equity for the pension plan. And thats IF they get the loans/bailout/DIP. am i the only one that sees this or did i take too many hits on the crackpipe last week?
The 'bailout policy' has gradually evolved since the September bailout of FRE and FNM. It is no longer certain that a bailout will result in dilution of equity. The best example of this is the C bailout, which resulted in (1) the amount of warrants being less than the amount of debt provided and (2) the warrant strike price being over $10. So it is possible that a GM bailout results in low or no equity dilution. Given this, I am playing GM as follows: long $6 puts and short $2.50 puts. In the situation that a bailout results in some dilution (but not "a lot") then this structure should allow me to participate in a fall in the GM share price down to $2.50.
I get what you are saying, but the diff between C & GM is GM still has to offload the pension obligations and from my sources it sounds like they are gonna be required to take some of that in equity. Even if they only take 10Bil in equity that is gonna ravage the common. The thing is people are pissed about the financials so they are gonna make sure that the gvt gets something in return. even if they get 20% of loans in equity (10Bil x.2=2Bil in equity) that would result in OS doubling. Thats without any of the pension liabilities being offloaded. I like your play, only downside i see is if they issue a 4bil "bridge loan" and shove it on obamas plate to deal with. I don't know what month your puts are on, b/c that is gonna be the real kicker of when they manage to put it together.
Thanks for your comments chsbla. My main concern is as you state - that the current government could "issue a 4bil "bridge loan" and shove it on obamas plate to deal with", without issuing any extra equity and/or warrants. In that case (like Citigroup), the share price could actually rise above $5. I am long the $6 JAN 2009 puts, but I can always roll these over to later months based on information leaks and/or formal bailout announcements between now and the end of 2008.
the equity in GM has long been gone. any new investor putting new money in this company's equity is hedged or just gambling or whatever. right now the big 3 is like gov't welfare program in creating jobs. it's better for the company to slowly wind down or reduce employment over time than close down overnight.
the bailout is to prevent the big 3 from shutting down production overnight. the fundamental problem is there isn't enough demand for their cars to employ that many people to make that many cars. the equity in GM has long been gone. any new investor putting new money in this company's equity is hedged or just gambling or whatever. right now the big 3 is like gov't welfare program in creating jobs. it's better for the company to slowly wind down or reduce employment over time than close down overnight.
I don't think that GM is going to get the Christmas present they're expecting. It's looking more like they, the Bush administration, are trying for a orderly crash landing. This will be a lump of coal in the GM Christmas stocking for sure.
right...so why is the common trading at near four fity. Im just wondering if im missing something here, there is no way that common is not going to get diluted no matter what happens. anyone else holding a bunch of puts?