GM Bondholders Hanging Tight - NY Times Dealbook

May 22, 2009, 8:03 am

G.M. and Creditors Face White-Knuckle Weekend
The long weekend will be anything but a holiday for General Motors, the giant automaker struggling to stay out of bankruptcy protection.

The company reached a deal Thursday with its union on concessions, but it is now racing the clock to persuade its bondholders to eliminate $27 billion in debt and avoid a bankruptcy filing.

G.M. has until Tuesday to persuade thousands of bondholders to agree to swap their debt for equity, which would fulfill its last significant requirement for restructuring ordered by President Obama. There appears to be little chance that the required 90 percent of bondholders will agree to its terms, making the prospect of bankruptcy increasingly likely for G.M., The New York Times’s Bill Vlasic reported.
Analysts said that the United Automobile Workers’ deal with G.M., which followed similar concessions to Chrysler, will increase pressure on bondholders to accept the company’s offer.

“I think there’s a shot it will succeed, but a very small one,” David Cole, chairman of the Center for Automotive Research in Ann Arbor, Mich., told The Times.
A coalition of small bondholders protested the terms of G.M.’s offer in Washington on Thursday. Larger, institutional bondholders have also opposed the deal, which calls for them to receive 225 shares of G.M. stock in exchange for each $1,000 worth of debt.
A G.M. spokesman, Greg Martin, told The Times the company had made no decision on whether to extend the exchange offer beyond the Tuesday deadline.
“We have made it clear that our viability requires us to take these actions to restructure our operations and reduce the liabilities and debt on our balance sheet,” Mr. Martin said.

G.M., which is subsisting on $15.4 billion in government loans, has until June 1 to meet the broad criteria for restructuring spelled out by a special presidential auto task force.

Under a plan announced last month, the Treasury Department would control at least 50 percent of the stock in a restructured G.M. A health care trust for union retirees would have about 39 percent, with bondholders getting 10 percent and current shareholders the remaining 1 percent.

Advisers to a committee of G.M.’s biggest bondholders, representing about 20 percent of the $27 billion in bond debt, have repeatedly criticized the plan as unfair and designed to fail. They have also accused the government of seeking to use them as scapegoats for a potential bankruptcy filing. Under their own proposal, G.M. bondholders would own 58 percent of the reorganized carmaker. These advisers have said that they are willing to negotiate with the company and the government but have made no headway thus far.
As for the U.A.W., details of its agreement with G.M. are being withheld pending a ratification vote by 61,000 union workers in the United States, which is expected to take place next week. But the deal does include financing the retiree trust. People close to the talks said the union agreed to allow G.M. to finance half of its future retiree health care costs — estimated at $20 billion — with company stock.

The Obama administration hailed the agreement as an important step in G.M.’s comeback plan.

The U.A.W.’s president, Ron Gettelfinger, had been critical of G.M.’s plans to cut an additional 21,000 union jobs, as well as increase its imports of vehicles made in China, South Korea and Mexico.

Whether those job cuts are addressed in the agreement is still unclear. But by agreeing to amend its contract, the union can rightfully say it has completed the task laid out for it by the Treasury Department.

Since G.M. first appealed for government assistance last fall, the U.A.W. has made several modifications to its 2007 contract, including eliminating a program that guarantees paychecks to laid-off workers. By completing its agreement on health care, the union has heeded Mr. Obama’s call for shared sacrifice among all G.M. stakeholders to fix the troubled company.

“The union has worked very well to create the right optics and to be in sync with the message the White House has put out there,” John Casesa, a principal in the automotive consulting firm Casesa Shapiro Group, told The Times.

The U.A.W.’s deal with G.M. follows a similar health care agreement it reached with Chrysler, which is also surviving on government loans.

Despite the agreement, Chrysler was forced to file for bankruptcy protection on April 30 after it failed to persuade a group of banks and hedge funds to unanimously agree to take cash payments to retire $6.9 billion in debt.

Now G.M. will make one last push to persuade its bondholders to take equity for their debt.

G.M.’s president, Fritz Henderson, has said repeatedly that bankruptcy is a “probable” outcome because of the difficulty in persuading 90 percent of the bondholders to agree to its restructuring terms.
In the event of a bankruptcy filing, the bondholders may be offered less attractive terms in exchange for their debt.

“The financial community and the union trust have been in competition for this stock,” Mr. Cole of the Center for Automotive Research told The Times. “But with the union deal settled, the pressure is only going to increase on the bondholders.”