Individual investors who hold notes issued by GM’s financing unit GMAC will have to queue up behind institutional investors in the event of a bankruptcy filing, according to a Bloomberg report.
These individuals hold around $14.6bn of so-called SmartNotes, which have been in issue since 2006. These notes, which were issued in $1000 denominations and were the brainchild of LaSalle bank,
…allow individuals to be paid interest on an annual, semi-annual, quarterly or monthly basis. They include a “survivor’s option,” permitting spouses to sell the bonds back to the issuer if the owner dies.
Unfortunately, SmartNotes are not included in GMAC’s $38bn plan to exchange securities for new, discounted debt and preferred shares or cash, Bloomberg said, citing a company spokeswoman. A deal which is open to the institutional holders of GMAC’s other debts.
SmartNotes investors “would be subordinated to the new notes, but they’re not being asked to take a principal discount”
This is significant news, and weirdly, it looks like Bloomberg’s been sitting on this story for weeks (or perhaps a couple of days):
The exchange is “limited to institutional notes and does not include retail debt instruments,” [Gina] Proia, the spokeswoman, said in an interview last month. She declined to say why SmartNotes rank behind other debt.
Individual investors holding securities that are being exchanged are also ineligible to participate in the swap, according to Proia.
Curiouser and curiouser – and caveat emptor.
Related links
GMAC seeks banks status to access bail-out – FT