The big news this week in the financial world came out on Monday morning at 8:00am Eastern time. General Motors declared bankruptcy. This means a lot for the company, employees, debt holders, and shareholders. This post will look at the impact on current debt holders and stock holders.
Let’s start with debt first because it is easier to explain. When a company goes into Chapter 11 bankruptcy, a judge can eliminate or reduce debt. If you are a GM bond owner, this will directly impact your future returns. That $1,000 you were expecting at maturity: not gonna happen. Your interest may be slashed too. You will be lucky to get anything back in the end.
Now for the stock. Lets say GM has 1,000,000 shares of stock outstanding. If you own 10,000 shares, that .001% of the company. When the government gave GM money, they were granted an equity share, lets say 1,000,000 new shares. Now there are 2,000,000 shares outstanding, but you still own 10,000. You now own .00005% of the company, or half of what you did before.
At GM, the situation is much more dire than the example above. The shareholders ended up going through a dilution well over the 50% above. The United Auto Workers were given 17.5% of the company, along with 55% of Chrysler. The US government gets 60%. The 22.5% left over, that gets divvied up among the current shareholders. That means every 5 shares before is like buying 1 share today.
Even worse… GM was de-listed from the stock exchange. Now buying and selling the stock happens on what are called the pink sheets. Pink sheets are far less liquid (harder to sell). Each share was listed at $0.08 at market close today (June 3rd).
If that is confusing, please ask questions in the comments.
