- The Washington Times - Wednesday, June 17, 2009

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.

Ron Sears

Family: Wife

Date purchased: 2004 and 2005

Percent of portfolio in GM bonds at purchase: 30 percent

Reason for purchase: Considered it a safe investment

Reason for holding after downgraded to junk status in 2005: Thought it would “turn around sometime.”

Original investment goal: Income and security

A few years ago, Ron Sears began losing weight and feeling sick.

“I thought I’d better sell off my stocks and get my wife something safe,” Mr. Sears said.

He bought GM bonds. The problem: He bought a great name at a bad time. Within months of one of his purchases, the bonds were downgraded to “junk” and his investment went downhill from there.

So did his health. He was diagnosed with leukemia, and he worries about his wife’s well-being after he is gone. That’s doubly true now that the bonds are valued at a fraction of what they were once worth.

“It’s going to force me to go into the savings,” Mr. Sears said. “It’s going to drain those down.”

Mr. Sears said the loss of income from the bonds will likely force him to sell his house within the next five years and to do without luxuries such as high-speed Internet and satellite television in the meantime.

“We’re going to have to stay at home, not use gasoline and open the windows to not use air conditioning,” he said.

Mr. Sears said the small return the government has offered to bondholders is unfair, but he has no choice but to take it. “We’re just going to have to bow our heads and put out our hands and say, ‘Whatever you want to give us,’” he said.

Gene Myers

Age: 74

Residence: Surprise, Ariz.

Occupation: Industrial engineer

Household income: $60,000

Family: Wife

Amount invested in GM bonds: $240,000

Date purchased: 2003 and 2004

Percent of portfolio in GM bonds at purchase: 50 percent

Reason for purchase: The company’s financial statements looked good at the time.

Reason for holding after downgraded to junk status in 2005: “The bottom had dropped out and to sell would mean a ferocious loss. Most of us hung on, believing there would be a recovery and not knowing the catastrophe to come.”

Original investment goal: Retirement

Gene Myers bought $240,000 worth of GM bonds over the past six years, taking advantage of the falling price and rising yield to finance retirement for himself and his wife.

But the loss of interest payments on those bonds will trim $1,200 from his monthly income. That will be quite a hit; Social Security payments are the couple’s only income other than their dwindling investments.

Mr. Myers is worried about paying his medical bills, and he thinks GM’s union employees though they will be making sacrifices, too are getting a better deal than the bondholders in the bankruptcy process.

“I know the lives of [GM’s autoworkers] will have to change, but they have one hell of a health plan,” Mr. Myers said. “My wife and I pay $644 a month in deductibles and prescription costs. And that’s all out of pocket.”

He said he knew the risks of the investment, but didn’t worry much about what he called “an American manufacturing icon.” The icon simply didn’t live up to its reputation.

Jim Dillahunty

Family: Wife

Date purchased: Before downgrade

Percentage of portfolio in GM bonds at purchase: 10 percent

Reason for purchase: Large company, good yield

Reason for holding after downgraded to junk status in 2005: “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.”

Original investment goal: Retirement income

Jim Dillahunty of San Marcos, Calif., said he can see why other GM bondholders are furious about the bad hand dealt to them in the government-led bankruptcy filing.

:”I empathize with these people,” said Mr. Dillahunty, 64, who retired as chief executive of his own bond-trading services company.

“An institution can write off losses and move on,” he said. “But these moms and pops are severely hurt by this.”

Mr. Dillahunty invested about $400,000, or 10 percent of his portfolio, in GM bonds, hoping to generate income in retirement.

He decries the heavy-handed treatment of bondholders who are far from Wall Street. But he also knows from his own business dealings that Main Street folks often lose out in tough times. “The average person, he doesn’t know what to do,” he said. “For the small investor, the consequences are severe.”

John Milne

Age: 54

Residence: Saginaw, Mich.

Occupation: Medical educator

Household income: $50,000

Family: Wife

Amount invested in GM bonds: $20,000

Date purchased: June to July 2008

Percentage of portfolio in GM bonds at purchase: Less than 10 percent

Reason for purchase despite “junk” status: “The bonds still looked better than the stock.”

Original investment goal: Retirement

For most of his career, John Milne owned and operated a school to train aides for nursing homes with his wife, Wendy, 67. She still works a little to keep up her license. They bought $20,000 of GM bonds, equally divided into two retirement accounts. Mr. Milne expected to hold them until maturity, providing funding the couple need to retire.

Mr. Milne made an educated guess that GM had taken sufficient steps to control costs, reduce debt and shore up its finances.

“At the time, they had done some things that seemed good for long-term investors,” he said. “They had just completed an agreement with the [United Auto Workers], which got rid of a lot of their cost and sold off most of GMAC.”

In the end, his gamble did not pay off. Mr. Milne said bondholders like himself and his wife have not gotten their due in GM’s restructuring.

“It was an unfair offer,” he said of the proposal to give the bondholders a 10 percent equity stake in the new GM when it emerges from bankruptcy and the option to buy 15 percent more through warrants.

“That new stock will dilute our stock and dilute the UAW’s share,” he said.

“It’s so totally different from Chrysler,” Mr. Milne said. “There are many more smaller lenders. We didn’t go into this with any plans to own the company we lent them money.”

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