GM Prefers Cash Over Stock for Bond Debt

TRAVERSE CITY, MI – General Motors Corp. will use cash instead of stock to address $8 billion in long-term bond debt to limit a decline in its earnings per share.

“We can’t sit back and watch,” GM Chief Financial Officer John Devine tells attendees here at the Management Briefing Seminars.

An accounting proposal made by the Financial Accounting Standards Board, expected to be approved as early as next month, is the reason behind GM’s move.

If approved, the regulation would change the accounting procedure for contingent convertible bonds, which could lower GM’s 2004 earnings per share as much as $1. The auto maker has an earnings-per-share goal of $7 for 2004.

GM CFO John Devine

GM will use cash rather than stock to pay for some contingent-convertible bonds sold in 2002 and 2003 to raise money for its then under-funded pension account. The bonds will be paid off over many years, with roughly $1 billion due in 2007.

Contingent-convertible bonds, also called CoCos, are stock-bond hybrids that can be converted into company stock at a higher price than what the stock trades for. The securities are popular because they lower the cost of borrowing.

CoCos currently are excluded from per-share profit calculations unless a company's share price surpasses the “upside contingency” – usually 20% to 30% above the price at which the bonds can be converted into stock – for 20 out of 30 days.

GM issued the bonds in three groups, with the stock price contingent convertible roughly ranging from $57 to $84. The face value of the bonds is convertible into as many as 147 million shares. GM’s stock price closed Thursday at $42.54.

The FASB proposal would change a primary benefit the CoCos provide to GM. It would require that CoCo’s be included in per-share profit calculations, joining a number of other items currently contained in a company’s share count. They include actual shares, options that are in the money and potential dilution from warrants and bonds.

“Simply put: GM would waive its right to issue stock, which would settle the principal amount of the debt,” Devine says. “That’s the $8 billion. This means we would use cash that would significantly limit any dilutive effect (on GM’s stock) of the convertible bonds.”

Devine says GM was planning to use cash to pay the debt anyway. So the company is not diverting money that it was planning to use elsewhere.

“Not really,” he says. “When we put this debt on last year, we were assuming we were going to pay it down with cash. It had this option for cash or stock. But we assumed we’d do it with cash. We’re just taking out the flexibility we had.

“We think this will satisfy FASB. If it is enacted, and we think it will be, we think we can react pretty quickly.”

A GM spokesman declines to say if the proposed accounting regulation would abate GM’s appetite for using CoCos to raise money.

[email protected]