Bloomberg : Raw Deal for GM Bondholders

GM Offers to Exchange $27 Billion of Debt for Equity (Update3)


By Caroline Salas

April 27 (Bloomberg) -- General Motors Corp. asked its bondholders to exchange $27 billion of claims for equity to help the biggest U.S. automaker avert bankruptcy.

GM, faced with a deadline from President Barack Obama to restructure, is offering bondholders 10 percent of the equity in the reorganized company, according to a news release today. Bondholders will also receive accrued interest in cash if they tender their holdings.

At least 90 percent in principal amount of the notes need to be exchanged to satisfy the U.S. Treasury, and without enough participation by June 1, GM expects to file for bankruptcy, the Detroit-based company said in the statement.

“You have a gun being put to your head saying that ‘If you don’t take this, we have something that’s even worse for you,’” said Shelly Lombard, a Montclair, New Jersey-based analyst for bond research firm Gimme Credit LLC. “It looks like a raw deal for bondholders. I just don’t think they have the negotiating leverage to get anything better than what’s currently on the table.”

Bondholders will be given 225 shares of GM common stock for each $1,000 in principal amount of notes tendered. The offer is contingent on cutting at least another $20 billion in liabilities by reaching a deal with the United Auto Workers over a retiree-medical fund and the U.S. converting loans to equity. GM has received $15.4 billion in aid from the U.S. government.

Bonds Rise

GM’s $3 billion of 8.375 percent bonds due in 2033 rose 2.4 cents to 11.15 cents on the dollar as of 10:42 a.m. in New York, according to Trace, the bond-price reporting system of the Financial Industry Regulatory Authority. The debt yields about 74 percent.

The Obama administration ousted Chief Executive Officer Rick Wagoner last month, saying that GM’s plan to return to profit wasn’t aggressive enough, and ordered new CEO Fritz Henderson to cut the automaker’s debt by more than initially demanded. GM will be forced to go into a government-supported bankruptcy without deeper cost cuts from its creditors by June 1, the administration said.

“A debt-for-equity swap has been expected and remains an unattractive option for bondholders -- it’s just kicking the can further down the road,” said Wesley Sparks, a high-yield portfolio manager and head of U.S. credit strategies at Schroder Investment Management in New York, which doesn’t own the automaker’s bonds. “A restructuring of the company is inevitable.”

Proof of Viability

GM is trying to prove it’s viable, a U.S. requirement to keep the federal loans. The original loan terms called for GM to slash two-thirds of its bonds through an exchange offer and for the UAW to reduce a cash contribution to the health-care fund to $10.2 billion from $20.4 billion.

The bond exchange offer is contingent on the health-care fund, known as a Voluntary Employee Beneficiary Association, or VEBA, swapping at least 50 percent of its claims for equity, with the remainder of the obligations paid in cash “over a period of time,” according to the statement.

The proposal is also conditional on the U.S. Treasury agreeing to exchange 50 percent of its loans at June 1, estimated to be $10 billion, for stock. The VEBA and the U.S. Treasury would own about 89 percent of the common stock in the reorganized GM after their debt exchanges, the statement said. The remaining 1 percent of stock would be held by GM’s existing common shareholders.

Retiree Investors

GM has thousands of bondholders ranging from institutional investors including insurers and pension funds to individual retirees. The ad-hoc committee of bondholders, whose members include San Mateo, California-based Franklin Resources Inc. and Loomis Sayles & Co. of Boston, balked at two other plans it was shown since December.

Before Wagoner was removed, GM had proposed that bondholders swap more than three-quarters of their stake for equity, according to a person familiar with the talks. That offer would have given bondholders 90 percent of the equity of the reorganized automaker and a combination of cash and new unsecured notes, the person said at the time.

Credit-default swaps protecting against a GM default for one year fell after the offer. The contracts dropped 5 percentage points to 79 percent upfront, according to broker Phoenix Partners Group. That’s in addition to 5 percent a year, meaning it would cost $7.9 million initially and $500,000 over a year to protect the debt.

To contact the reporter on this story: Caroline Salas in New York at csalas1@bloomberg.net

Last Updated: April 27, 2009 11:24 EDT