Moody's Says that Government Bailout of GM to involve Prepackaged Bankruptcy

According to Moody's, General Motors Corp. is likely to file for a prepackaged bankruptcy with government backing. The credit rating agency also believes that bondholders will recover slightly more than than 25 cents on the dollar.

Moody's describes this scenario as better than the freefall bankruptcy scenario (they assign a 5% probability to a bankruptcy with no government assistance), but dramatically worse than the bailout of the automakers with no bankruptcy that equity and debt markets are currently pricing in (to which they assign a 25% probability).

While the equity is likely to end up worthless, the bonds may have value if there is a recovery of 25%. According to my calculations, GM’s $3 billion of 8.375 percent bonds maturing in 2033 are trading at 13.5 cents, yielding 62 percent.