'Smart' investment? Or gamble?

[trof]

Ford Motor Credit Senior Notes issued at $25 par pay 7.5% annually or $1.84 per share. They expire in June 2043.
They closed at $13.12 yesterday.
At that price the current return is 14% annually.
I think Ford will survive.

Smart investment or crapshoot?
What say you?

[Uben]

1. Crapshoot

Everything is a crapshoot these days. Nothing is certain. If it was, everyone would get in on it.

Looks good now, though.

[LakeSamish706]

2. I also think Ford will survive, it is a crap shoot but if one has spare money...

the return is good.

[Yupster]

3. Ask a GM $ 25 par bond owner

Right now they're being offered between 2cents and 5 cents on the dollar if they'll give up their bonds and give up their right to be first in line in case of bankruptcy.

I don't think they'll go for it, but they'll be called greedy bastards when they don't.

[Egalitariat]

5. I wouldn't go for it. Everybody should understand the risk of loaning money

and the fact that their borrower may go bankrupt. But they should also feel like the rule of law (in this case - bankruptcy law) will prevail.

[trof]

7. You would be asking me.

I also own GM Senior Notes.
I retired in 1999 and got out of all common stocks.
I invested only in debt instruments of solid blue chip companies.
Like Ford and GM.
:rofl:

[Yupster]

10. So are you going to take the offer?

The worst case scenario is that you take the offer and trade your bonds for stock, and then six months later the company goes into bankruptcy anyway, and then you go into bankruptcy as a stockholder, not a bondholder so you'd be wiped out.

[trof]

13. Delta did just that a few years ago.

Declared bankruptcy, reneged on my senior notes, and issued me 'new' common stock in exchange.
I sure know how to pick 'em.
:-(
Haven't decided what to do about GM yet.
:shrug:

[A HERETIC I AM]

8. Not true.

Where do you get the information that "they're being offered between 2cents and 5 cents on the dollar" ?

One offer I'm familiar with consists of 225 shares of common stock for every $1000.00 face value worth of preferreds. $1000 /$25 = 40 preferred shares. GM closed today at $1.60. 225 shares of common stock times $1.60 = $360.00. $360 divided by 40 shares of preferreds = $9.00 per share.

It isn't between 2% and 5%. In that example it's 36%. I concede that math is based on today's common stock close. GM has issued 10 different $25.00 par Senior notes of various maturities and coupons according to Quantumonline (Registration required) They range in current price from $1.57/share to a little over two bucks. The offer is for "face value" which is $25.00, not the price the shares are bid at. If the common goes up, it benefits the preferred holders even more. If it goes down, it hurts them more.

For the record, Preferred share holders have no "right to be first in line in case of bankruptcy". That right falls to senior bond holders. Preferred holders are behind them but ahead of equity holders.

[Yupster]

11. GM is going to issue 62 billion additional shares of stock

Won't that dilute all the value out of the shares?

Then they're going to do a 100 - 1 reverse stock split so those 225 shares will become 2.

To me the easiest way to illustrate the proposal is

Bondholders give up $ 27 billion for 10 % of the company.
US treasury gives up $ 10 billion for 50 % of the company.
UAW gives up $ 10 billion for 39 % of the company.

The bondholders are not being treated fairly. Especially since they are at the front of the line legally in a bankruptcy situation.

[A HERETIC I AM]

12. Fair enough and yes.

Issuing additional shares will most certainly dilute the current outstanding shares.

I had heard about the reverse split but it completely slipped my mind when I posted my response last night. My apologies. It is certainly a game changer.

I agree with you completely that the bondholders are being asked to take it on the chin. Many people on this board don't seem to have any problem with that but bondholders are not investors - they're creditors and shouldn't be treated as common stock holders.

[Egalitariat]

4. You'd become one of those dreaded bondholders who might get chastised for not "sacrificing"

your investment if things go awry.

[Warpy]

6. If you can afford to lose, go ahead

because there is a potential gain there, too.

Just be aware that the return is unrealistic and will likely be far less if the company is to survive.

My guess is that Ford will survive in one form or another. Their overseas divisions will allow them to.

However, it's crazy to put all your investment dollars into one single investment. If this is what you're considering, don't do it. However, if you're just taking a chance with play money, it seems like a good chance to take.

[trof]

15. I would NEVER put everything into one investment.

That IS crazy.

[A HERETIC I AM]

9. Here's the Prospectus on those notes, Trof.....

http://www.sec.gov/Archives/edgar/data/37996/000095012403002082/k77726be424b5.htm

It appears these notes were issued in part to retire higher coupon notes of an earlier series. They are callable with 30 days notice.

If I'm looking at the same ones you are talking about, they closed today at $12.96 so their yield is 14.47%.

They have tracked back up since early March. They are rated Ca/CCC- by Moody's/S&P. That puts them squarely in the "Junk" status or more politely, "Highly Speculative".

Of the big 3, Ford certainly seems to be in the best shape thus far. If they are able to get their house in order such that their credit rating is revised back up, their preferreds stand to do very well.

I think Ford will survive as well. They have a ways to go, but they seem to be in good enough shape to fend off any possible buyers.

Purchasing these securities is certainly speculative, but you are going to be paid to wait. Make sure you are prepared to see the value of the shares fluctuate.

[trof]

14. Another consideration

IF, and it's a BIG 'if', Ford makes it, and IF interest rates stay low, they MAY want to recall the notes in order to borrow at lower interest rates. At $25 par, that's doubling your money plus interest earned.
:shrug:

[A HERETIC I AM]

17. Absolutely a possibility....BUT...

If Ford does come out of this relatively soon, they still have their onerous credit rating to deal with. Unless and until they can get a rating back above speculative, they are going to have a hard time issuing new debt at a lower rate. They'll have a hard time replacing those coupons because it's likely no one will underwrite them. They can't simply call them in and expect to issue new debt at say 4.5% or 5%. The securities you are looking at mature, as you mentioned, way out in 2043 so a lot can happen. If nothing else, you have some time on your side.

Either way, a 14% yield is hard to pass up.

[Joanne98]

16. If I had any money I'd buy Lear..

They were below a dollar just the other day. I was thinking damn, I wish I had some money. Now look..

http://finance.yahoo.com/q?s=LEA

2.13... I still buy on the next dip. If there is one.

Or AXL up 58% today......

http://finance.yahoo.com/q?s=AXL