General Motors (GM) is working with bond holders to try and avert a bankruptcy filing. There are reports this morning that an agreement on a proposed debt for equity swap may have been reached. For current GM shareholders the question is pretty simple, should you sell at the current price of $1.35 per share?
Well, if GM files chapter 11 shareholders will very likely be wiped out completely (there have been a few cases when they aren’t, but it’s very unlikely). But what if the bond holders agree to certain terms and the company avoids bankruptcy? Isn’t that possibility the sole reason GM shares trade at more than $1 right now, even though the company is effectively bankrupt?
The short answer is yes, but consider another fact. In the latest proposal made to bond holders, current GM equity holders would retain 1% of the newly restructured company’s stock. In order to make the case to hold onto GM stock today, one has to argue that General Motors equity, after the restructuring, will be worth at least $80 billion (100 times the current $800 million market capitalization). How would one even begin to make that case?