The Obama union debt premium

Reuters:

Scores of companies are being punished in the bond market as the Obama administration's policies on General Motors and Chrysler LLC create new risks for creditors, a veteran bond strategist says.

As GM teeters toward a bankruptcy filing and Chrysler attempts to restructure in bankruptcy court, the Obama administration is offering most of the recovery value of those companies to "a favored political class, in this case the United Auto Workers, leaving creditors with very slender debt recoveries," Christopher Garman, founder of Garman Research in Orinda, California, said in a report released late on Friday.

President Barack Obama and a more tightly Democratic-controlled Congress were sworn in January.

To gauge whether those cases have made debtholders wary of other companies with so-called favored political classes, Garman compared spreads, or bonds' extra yields over U.S. Treasury yields, for companies with collective bargaining agreements with the high-yield bond market as a whole.

While the two performed in line with each other since 2003, they diverged sharply in February, with spreads on companies with organized labor gapping nearly 11 percentage points higher than the market as a whole, according to Garman's research.

The gap in spreads has persisted and was about 9 percentage points as of mid-May, Garman said. The gap appeared shortly after strategists reported signs that bondholder negotiations with GM were unraveling.

...

There is more.

I have been predicting this premium since I saw the original Chrysler and GM proposals. Screwing secured creditors to favor unsecured creditors who have political connections is a recipe for higher interest rate for firms with unions.

Considering that they are already at a cost disadvantage to nonunion employers, it is likely to lead to the failure of more companies with strong unions. In other words the union favoritism will be counter productive in the long run.

Comments

Popular posts from this blog

Police body cam video shows a difference story of what happened to George Floyd

The plot against the President

While blocking pipeline for US , Biden backs one for Taliban