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Fate of GM lies with recalcitrant bondholders

(Agencies)
Updated: 2009-05-27 09:40

NEW YORK -- General Motors Corp. has nearly all the pieces lined up for an orderly restructuring that would save it from bankruptcy, except for one: persuading the holders of some $27 billion in bonds to exchange their debt for stock.

The deadline for GM's bondholders to tender their debt is midnight Tuesday, and GM said it will announce the results Wednesday morning. If bondholders representing 90 percent of GM's unsecured debt, about $24 billion, don't agree to the exchange, GM has said it will file for bankruptcy protection.

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With the United Auto Workers agreeing Tuesday to take a much smaller stake in GM than originally expected, the automaker has about 19 percent of its equity with which it could potentially sweeten the pot for bondholders.

But the Treasury is reportedly planning to fork over as much as $50 billion in debtor-in-possession financing to help the cash-bleeding company through its restructuring, The Wall Street Journal reported late Tuesday. In return, the government could demand up to 70 percent of GM's equity, the paper said, citing people familiar with the matter.

Such an arrangement would leave bondholders back where they started, and a bankruptcy filing all but certain.

A committee representing GM's biggest bondholders, mostly big banks and other institutional investors, has opposed the debt-for-equity swap from the start. A spokesman for the group declined to comment Tuesday on the progress of the exchange.

Smaller, "retail" bondholders -- individual investors like retirees and families -- have also railed against the terms of the exchange. A retiree group called The 60 Plus Association has organized bondholder rallies across the country to protest GM's offer. A spokeswoman for the organization said it is preparing to mount a legal challenge to terms of the bond exchange in bankruptcy court.

Both groups say the offer gives them too small a stake for the amount they are owed. When GM announced its debt exchange last month, the company offered bondholders 225 shares of common stock for every $1,000 in debt. That would leave GM bondholders with a 10 percent stake in the restructured company.

The United Auto Workers union originally was to get a 39 percent stake, with the federal government taking 50 percent for exchanging a combined $20 billion of their debt to equity. Current stockholders would end up owning just 1 percent of the company.

"It wasn't particularly generous" to the bondholders, said Shelly Lombard, senior credit analyst at New York-based bond research firm GimmeCredit. "I think it's one of those things where GM now figures bankruptcy is inevitable."

However, the final makeup of a reorganized GM remained unclear Tuesday.

GM's tentative agreement with the UAW was revealed to union members Tuesday, and it would give the union a 17.5 percent stake in the company, 55 percent smaller than expected. The union also will receive a warrant for an additional 2.5 percent stake as partial payment of the $20 billion that GM must put into a trust that will start paying retiree health care costs next year.

The trust will get $6.5 billion of preferred shares that pay 9 percent interest, plus a $2.5 billion note. The remaining $10 billion will come from health care trust funds that GM already has set up. The trust also is getting a seat on GM's board, although it will have to vote at the direction of GM's other independent directors.

The deal leaves 19 percent of GM's shares unaccounted for. The union's roughly 61,000 GM workers must vote on the agreement by Thursday. Factory-level union leaders from across the US unanimously endorsed the deal at a meeting Tuesday in Detroit.

GM, which owes the government $19.4 billion, has said it could extend the deadline for the bond exchange and will decide Wednesday. The company previously has said the government was preventing it from offering bondholders more than 10 percent of the restructured company.

The government has had dialogue with GM's bondholders but believes it has made them a fair offer relative to their standing in a potential bankruptcy, said a person familiar with the discussions. The person spoke on condition of anonymity because the discussions were private.

"Recently there have been far more constructive and orderly conversations with the bondholders," the person said. "We're going to have them right up to the very end."

GM spokeswoman Julie Gibson declined to comment on the progress of the debt exchange Tuesday evening, pending an announcement scheduled for Wednesday morning.

Some analysts said GM's bondholders may be holding out for better terms in bankruptcy. Stephen Lubben, a law professor at Seton Hall University, said unsecured creditors like bondholders often recover 40 percent of their investment in bankruptcy.

"One way of looking at this is the bondholders feel they can't do any worse than bankruptcy," Lubben said. "They may not do much better, but they can't do any worse."