New Bond Risk Premium - Shared Sacrifice

While General Motors bondholders are still angry over what they, and many others feel is unfair treatment, those holding other bonds are beginning to think about how they are going to price in what is being labeled as a new level of risk - which could be called the "shared sacrifice" risk (see Bloomberg article). As mentioned in the article, "Bondholders are told to give up legal rights, and cash, as part of a government-mandated tradeoff that favors a politically connected special-interest group." This has some worried that such an undermining of long-standing legal agreements could extend beyond the corporate world, where a new precedent seems to have been set. Those holding equity should also be worried, as raising capital through debt offerings will get more expensive. As mentioned recently by David Einhorn, it is a “quixotic idea ... that creditor recoveries in troubled situations can be determined by an arbitrary sense of shared sacrifice rather than legal agreements and long- established prior practice." Could Treasuries and Municipal debt be next? Would problems with covering local payrolls for city employees such as firefighters and police cause political leaders to ask municipal bondholders to share in the sacrifice? Outcomes such as these, which seemed unlikely to bond holders just 12 months ago, have some considering various new risk factors when pricing bonds. Now the size of the workforce, the level of unionization, and political importance (swing state, home district of a powerful chairperson) are all being consider with greater interest. And you though determining credit risk was hard before. Just wait until a new CDS-like derivative starts to be offered to help manage such risk.