WORLD> America
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WORLD> America
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US likely taking majority ownership of GM
(Agencies)
Updated: 2009-05-27 17:06 "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." 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.
GM 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." Another factor complicating the decision making of GM's bondholders: Many large investors hold insurance policies on their bonds known as credit default swaps. Such policies would reimburse bondholders in the event of a "credit event" like a bankruptcy filing. Investors who hold credit default swaps on GM debt stand to make about $2.33 billion if the insurance contracts are triggered, according to the Depository Trust & Clearing Corp. Lubben said holders of such swaps "would do better in bankruptcy because the bankruptcy is going to trigger their (insurance) contracts." Some believe the offer was doomed from the start. It's unclear how many of the thousands of individual and institutional bondholders have participated in the exchange, but analysts speculate the number is low. "It's nowhere near 90 percent," said Kip Penniman, analyst for KDP Investment Advisors. "If GM announced they got low single-digit participation, it would be a slap to GM and the absolute response to the Treasury-mandated offer. ... A cynical person would say that the offer was set up to ensure GM would go into Chapter 11 and provide the government a scapegoat." If GM's bondholders do tip the company into bankruptcy, the chain of events would prove similar to what Chrysler faced one month ago. In that case, four banks holding 70 percent of Chrysler's $6.9 billion secured debt agreed to take $2 billion in cash, but a collection of hedge funds refused to budge, sending the automaker into bankruptcy protection. However, the two cases are different in important ways. GM's bondholders are unsecured, meaning their debt isn't backed by hard assets like factories and property and are therefore likely to see a smaller recovery in bankruptcy. They are also more diverse and tougher to organize, ranging from big banks to hedge funds to mom-and-pop investors. GM came closer Tuesday to settling the fate of Opel, its German operations. GM has been trying to sell Opel, and several suitors have emerged, including Italian automaker Fiat Group SpA and Canadian auto parts supplier Magna International Inc. German Chancellor Angela Merkel is scheduled to meet Wednesday with German and US officials, and representatives of GM and Opel's potential suitors.
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