Main Street GM Bondholders (from theStreet.com)

Automakers What if GM Bondholders Got Cars?
Ted Reed
05/20/09 - 12:20 PM EDT
Updated from 8:53 a.m. EDT

Unsecured bondholders of General Motors(GM Quote) are looking at the prospect of pennies on the dollar for their investments.

Perhaps cars for debt is a better option than equity for debt, even if it is an unlikely one.

"A lot of my little mom-and-pop investors might be better off picking up a shiny new automobile from a dealer being closed down by GM," says Jim Martin, president of the 60 Plus Association, a seniors advocacy group that created a spinoff group, "Main Street" bondholders, to represent GM bondholders in response to members' concerns.

"Let's face it, going into bankruptcy, they may lose everything, and probably will," Martin says. "A lot of people are telling me the bonds won't be worth the paper they are printed on. A new car beats nothing."

GM spokeswoman Julie Gibson says the company's offer is the only one on the table. "There's only one offer that we are legally authorized to make, and that's the one we made," she says.

Gibson notes that the Obama administration's auto task force is "the final authority" on what the automaker can offer shareholders. "I honestly have no idea whether there's room for negotiation or not," she says.
Right now, that offer is to swap about $27 billion in bonds for 10% of the shares in a new GM. Bondholders are being asked to swap at the rate of 225 shares for every $1,000 of principal. The exact value of the proposed exchange is unclear, but typically in bankruptcy, unsecured bondholders get pennies on the dollar.

Share of GM were trading up 20 cents to $1.47 shortly after 12 p.m. Monday.

Some big bondholders, holding about 20% of the $27 billion, are represented by a group that calls itself the Ad Hoc Committee of General Motors Bondholders and have retained an attorney.

By contrast, individual bondholders, who number in the thousands, are not represented. However, their support for the restructuring plan is necessary because the U.S. Treasury has determined that about 90% of the bondholders need to accept the offer in order for GM to avoid bankruptcy.

In that regard, while it is conceivable that Martin's suggestion that new cars be offered could potentially ease the path to a deal, the obstacles -- including the large number of bondholders and the short amount of time -- are plentiful; the Treasury has shown no inclination to make changes, and the widespread consensus view is that GM will be forced to file for Chapter 11 bankruptcy.
Even Jim Graves, a Celebration, Fla., software developer who is a member of the Main Street Bondholders, has doubts about accepting a car in lieu of financial assets. Graves owns about $100,000 worth of GM bonds, which he acquired starting in April 2008; his mother, a retired GM employee, also has $100,000 worth.

Graves says his mother suggested his purchase of the bonds, and he liked the relatively high yield. Now, he says, "No one has explained to me the rationale where the government will forgive ($15.4 billion) and take 50% of the stock, while the bondholders will forgive $27 billion and take 10%."
He had hoped the government would pay cash to the bondholders, mitigating the need to dilute the stock. Now his hope is that bondholders will get more than 10% of the company and that the shares will start to rise after the new stock is issued.

As for getting a new car instead, Graves has little interest and noted that his mother bought a Saturn in January.

Meanwhile, Martin says that about 300 bondholders have contacted him. Main Street Bondholders has held events in Warren, Mich.; Tampa, and Philadelphia, and plans one in Washington on Thursday.
"We've got a tiger by the tail," Martin says. "The little guy is being squeezed and he does not have a seat at the negotiating table.

"We're not talking about speculators here," he says. "A lot of these people put money for retirement into these bonds, and they didn't see this coming (because) GM is an icon. They should have some say-so."