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GM Nirvana


True to form General Motors (GM:NYSE) announced a $3.5 billion convertible bond issue this morning (in addition to $10 billion in straight corporate debt) in order to restructure the debt for its pension liabilities. I say "true to form" because one can almost map out the companies that will be issuing convertible paper (heavy debt and poor credit ratings) to take advantage of hedge fund mis-pricing. I say "restructure the debt" because the debt was always there; the company just transferred liability from its pension fund employees to the public.

The convertible bond issue amounts to about 16% of the total market capitalization of the company ($3.5/$21 billion). The issue immediately dilutes the stock by about 9% assuming a .5 delta on the imbedded option, and ultimately by the 16%. Normally in a convertible bond deal, this would cause the stock to fall by the same amount, so you would expect the stock to fall anywhere from $3.5 to $6 from the current price of $38 on the announcement. The stock, however, is up on this deal.

I will leave it to smarter minds to answer why reshuffling liabilities and issuing stock is positive for the stock price. I do have a volatility position in the stock. My expectation for volatility is that it (along with relative option prices) will come down due to the convertible bond issue: The company is selling a large amount of calls to the public, which should dampen the volatility.
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