Call them the unlikely speculators.
Mechanics, educators, engineers of modest means. These are among the roughly 100,000 people who own General Motors Corp. bonds. Some bought the bonds before they were downgraded to junk status yet decided to hang on to them. Others went in with eyes open, buying at a substantial discount to the bonds’ face value, betting the company wouldn’t crater and their gamble would eventually pay off.
Speculation was what they did, whether they like the term or not.
John Milne, 54, a teacher of nursing home aides from Saginaw, Mich., bought $20,000 of GM bonds a year ago. At that time, long-term GM debt was trading at about 60 percent of face value. It would fall below 20 percent by year’s end.
• THE BONDHOLDERS: Click here to view vignettes of eight GM bondholders.
Buying at distressed prices dramatically increases investors’ yield, because they get the same interest payments but paid less for them. But the low price and high yield also indicate that other potential buyers doubt that the company will be able to repay the debt down the road.
Mr. Milne saw signs of a turnaround. “[GM] had just completed an agreement with the [United Auto Workers], which got rid of a lot of their costs,” he said. “The bonds still looked better than the stock.”
But the doubters had it right.
Financial planners recommend that average investors avoid buying junk bonds - or any bonds - on their own.
“Just because the price goes down and the yield goes up doesn’t mean it’s attractive,” said Paul Palazzo, managing director of financial planning for Altfest Personal Wealth Management in New York. “Individual bonds in general are very dense. It’s difficult to understand all the risks.”
Jim Dillahunty, 64, of San Marcos, Calif., who bought $400,000 in GM bonds before the downgrade, took a calculated risk to hold them afterward.
At first, he didn’t anticipate how much trouble would befall GM. As those troubles multiplied, he felt he had a backstop in bankruptcy court.
“In the back of my mind, the thought was that in bankruptcy the bonds would be worth 50 cents on the dollar. That didn’t pan out,” he said.
What the bondholders will recover in GM’s bankruptcy depends entirely on its future stock price, but GM bonds traded as low as 5 cents late last month.
What follows is a look at some of the people who took the same risk with GM bonds - and came to regret it.