GM Bondholders Pursue Separate Bankruptcy Strategies

The prospect of General Motors avoiding bankruptcy is becoming "less likely," and that may be pushing bondholders to pursue separate bankruptcy strategies, two sources close to government talks said on Tuesday.

The Obama administration's auto task force led by Steven Rattner is in its second week of talks in Detroit and is preparing a reduced term sheet for bondholders for about $28 billion of unsecured GM debt.

Those creditors have expressed frustration over the lack of detail they are receiving directly from the U.S. government or from GM in their talks. A united front by the 10-member bondholder committee may be starting to show signs of strain, according to two sources familiar with the group.

"Bankruptcy court is a big unknown, and saying that we'll be in and out within two months doesn't sit right," said one person close to the bondholder committee.

"The goal is to have an honest negotiation and that's what we're holding out for," the source said, who declined to be named due to the confidential nature of the negotiations. "An out-of-court scenario is becoming less and less likely with each passing day."

At least one large bondholder is preparing for potential bankruptcy by reviewing which courts may be most favorable to bondholders, and has ruled out the Eastern District of Michigan as being more favorable to the United Auto Workers union, according to a second source familiar with the talks.

The perception is that GM and the union would have a home court advantage in Michigan, and that the issue may draw protests in Detroit and enflame emotional confrontations, as opposed to a potential filing in New York or Delaware, that person said.

GM's 8.375 percent notes due in 2033 fell less than 1 cent on the dollar on Tuesday to 9 cents, yielding more than 91 percent, according to MarketAxess data.

GM's shares were up near $1.80 in trading on Tuesday.

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