NEW YORK (AP) - 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.
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 said late
Tuesday. In return, the government could demand up to 70 percent of
GM's equity, the paper said, citing people familiar with the
Such an arrangement would leave bondholders back where they
started - and a Chapter 11 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
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
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
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 U.S.
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
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
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
Still, others 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 crosstown rival
Chrysler LLC 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
Even if GM's bondholders decline to go along with the exchange,
the automaker was lining up the pieces of its restructuring Tuesday
evening, when details of its new labor agreement emerged.
GM also 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 was scheduled to meet Wednesday with
German and U.S. officials, and representatives of GM and Opel's
Shares of GM traded erratically Tuesday, ranging between $1.12
to $1.84. They closed up a penny to $1.44.