GM (GM) would like to get some unsecured debt-holders to swap their crumbling paper for equity in the failing auto marker. It may appear that this would solve a problem, but it creates several more and hardly cures what ails the firm.

According to The Wall Street Journal, "By agreeing with certain debt-holders to take equity in exchange for existing debt, the auto maker could offer these investors an alternative to a bankruptcy filing. Many unsecured debt-holders stand to absorb big losses on their investment. Access to equity could allow them to cash out of the company at a more attractive price. The proposition comes as the company’s debt is trading at distressed levels."

Getting to that "attractive price" may be nearly impossible. With its stock at $5.24, GM has a market cap of $3.2 billion. A large conversion of debt to equity could dilute current shareholders by two or three times the current level of stock. In effect, the firm’s price-per-share could be pushed well below $2.

And, if the government loans GM $10 billion or more, the value of the equity could be further compromised.

None of this makes any difference if the operational parts of the company are not significantly improved. By most estimates, GM’s sales will continue to drop by 30% year-over-year for at least another two or three quarters. In a deep recession, that could go on even longer.

The debt transaction also has nothing to do with cutting labor costs through what may be bitter negotiations with the embattled UAW.

Other than those issues, it is a great idea.

Douglas A. McIntyre

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