By Michael Aneiro; The Wall Street Journal ~ Nov 02, 2010

Legacy bonds of General Motors Corp. were hit hard Tuesday as reported terms of an anticipated initial public offering later this month fell short of bond market expectations.

Motors Liquidation Co.'s 8.375% notes due 2033 fell 3.3 points to 33.7 in heavy trade, according to bond trading platform MarketAxess. GM's 8.25% notes due 2023 fell 3.5 points to 32.25 in active trade.

Holders of the bonds, which predate the Chapter 11 filing of General Motors Corp. and its subsequent emergence as General Motors Co., are due to receive equity in the restructured company once it completes its initial public offering plan.

The plan would cut the U.S. government's stake in General Motors to about 35% from the current 50%, The Wall Street Journal reported Tuesday, and would include a stock split tripling the number of common shares available to 1.5 billion, valuing each share somewhere between $26 and $29. Before the three-for-one stock split, that would put common share value between $78 and $87.

Market participants say bondholders had expected higher valuations suggesting a four-to-one stock split, which would have meant greater value for bondholders' equity stake.

"Most people looking at it had put a much higher valuation on the stock and had numbers north of $100" per share, said Shelly Lombard, senior high yield analyst at bond-research firm Gimme Credit.

Ms. Lombard notes that IPOs are often slightly underpriced to make them more likely to reward investors by trading higher in the secondary market, but she says that flies in the face of the argument that the government is trying to get maximum value for the company while it sells its stake.

"It looks like it's priced pretty conservatively, which is surprising because the company has been doing relatively well," Ms. Lombard said. "People are trying to figure out why."

Write to Michael Aneiro at [email protected]