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GM Bondholder Deal Still A Hope: White House

The Obama administration continues to try to facilitate a long-shot debt-reduction agreement with reluctant General Motors bondholders despite the company's fast-approaching bankruptcy deadline, the White House said Wednesday.

General Motors logo
General Motors logo

While overwhelming rejection by bondholders Tuesday of a proposed debt-equity swap set the stage for a GM bankruptcy by June 1, the administration said it is not giving up on what industry experts believe is an element of the automaker's restructuring that is destined to be settled in court.

White House spokesman Robert Gibbs was not specific on the parties involved in any effort led by the White House/Treasury Department's autos task force but said there is still work to be done.

"We're working towards —our hope is —an agreement with all the stakeholders involved to continue General Motors and I think we're making progress," Gibbs said. "Hopefully, we'll have news to report soon on that."

With ratification of labor concessions expected this week, bondholders remain the major piece of GM's restructuring puzzle not yet in place voluntarily.

A General Motors bankruptcy filing seemed inevitable after a rebellion by its bondholders forced it to withdraw on Wednesday a plan to swap bond debt for company stock.

But there is no expectation of a bankruptcy filing by GM this week, a source familiar with the discussions said Wednesday. The source said it was likely that the timing of any next steps would be around the June 1 deadline the government has set for GM's stakeholders to reach agreement on restructuring.

GM has until Monday to complete a government-ordered restructuring that includes debt reduction, labor cost cuts and plant closures.

But a Chapter 11 reorganization is likely after the company said its offer to exchange $27 billion in unsecured debt for 10 percent of the company's stock had failed. GM has received $19.4 billion in federal loans.

General Motors bondholders felt they deserved something like a 58 percent stake in the company in exchange for their billions of dollars in debt. What they were offered wasn't even close. GM bondholders are owed about $27 billion, the largest chunk of GM's roughly $58 billion in debt.

As a result, the largest industrial bankruptcy in U.S. history is now all but certain. The bondholder rejection virtually ensures GM will file for Chapter 11 bankruptcy protection within days.

"They said no. That's it. They tried. That's why they're going to have to file," said John Pottow, a professor at the University of Michigan who specializes in bankruptcy.

The government, which has already extended nearly $20 billion in loans to GM, ordered the company to come up with a plan that 90 percent of its bondholders would agree to. But the government allowed it to offer only 10 percent of the company's stock. GM was forced to withdraw the offer Wednesday after it fell far short.

A person familiar with discussions between GM and the government told The Associated Press any bankruptcy filing would probably come around the government's Monday deadline for GM to finish restructuring or enter court protection. The person asked not to be identified because the talks are private.

To avoid bankruptcy, the government had said GM must shed debt, cut labor costs and close plants.

News of the failed GM bond exchange offer sent its shares down 22 cents, or 15.3 percent, to $1.22 in afternoon trading.

John Pottow, a professor at the University of Michigan who specializes in bankruptcy, said GM evading Chapter 11 now is almost impossible. "They said no. That's it. They tried. That's why they're going to have to file for bankruptcy," Pottow said.

GM spokesman Tom Wilkinson said the board will meet later this week to decide its next move, but he would not say exactly when. He also would not say if the company would soon file for Chapter 11, nor would he reveal what percentage of bondholders took the offer.

"The principal amount of notes tendered was substantially less than the amount required by GM to satisfy the debt reduction requirement under its loan agreements with the U.S. Department of the Treasury," GM said in a statement issued Wednesday.

The Obama administration has said it would only provide more funds if 90 percent of the bondholders, as well as unionized workers, agreed to concessions that substantially reduced GM's costs.

A GM bankruptcy would be the fourth-largest in U.S. history based on its $91 billion in assets, and the largest for an industrial company. The top bankruptcy by assets was the September 2008 filing by Lehman Brothers at $691 billion, followed by Washington Mutual at $327.9 billion, according to BankrupctyData.com.WorldCom, ranks third at $103.9 billion, while Chrysler's bankruptcy filing would be seventh at $39.3 billion.

There was a small hope Tuesday that GM could avoid a bankruptcy filing when the United Auto Workers union disclosed that it would take a 20 percent stake in GM — down from the original plan of 39 percent. That seemingly freed 19 percent of the Detroit-based company's shares to sweeten the pot for its recalcitrant bondholders.

Wilkinson would not say why GM didn't make the offer to bondholders more attractive. The deadline for GM's bondholders to tender their debt was midnight Tuesday.

Because the bondholder deal did not go through, the equity freed by the UAW deal now apparently will go to the U.S. government, which may have to commit billions more for GM's restructuring in court.

The government's stake in the company originally was to be 50 percent, according to GM's regulatory filings. But it now could be as high as 69 percent. The Canadian government also could get equity for up to $8 billion in aid for the automaker.

The UAW disclosed Tuesday it agreed to take a much smaller 17.5 percent stake in GM, plus a warrant for 2.5 percent more to partially fund the $20 billion that GM must put into a trust that will start paying retiree health care costs next year.

In exchange for agreeing to a lower equity ownership stake, GM promised the union $6.5 billion of preferred shares that pay 9 percent interest, plus a $2.5 billion note. The union, facing the possibility that it may not be able to quickly sell GM shares to fund its trust, preferred the certainty of the $585 million annual preferred stock dividend.

The remaining $10 billion will come from health care trust funds that GM already has set up. The trust will get a seat on GM's board as well, although it will have to vote at the direction of GM's other independent directors. The concession deal, on which roughly 61,000 workers will vote by Thursday, also froze wages and cut retiree health care benefits, performance bonuses and cost-of-living raises.

When GM announced its debt exchange last month, the company offered bondholders 225 shares of common stock for every $1,000 in debt—or a 10 percent stake in the restructured company.

In addition to the UAW's share, the federal government was to take 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.

A committee representing GM's biggest bondholders—mostly big banks and other institutional investors—has opposed the debt-for-equity swap from the start.

Smaller bondholders—individual investors like retirees and families—have also railed against the terms of the exchange. Both groups say the offer gives them too small a stake for the amount they are owed, and some have pledged to fight in bankruptcy court.

GM had said previously that the government was preventing it from offering bondholders more than 10 percent of the restructured company.

Some analysts said GM's bondholders may be holding out for better terms in bankruptcy, where they would normally get up to 40 percent of their holdings back.

Another factor complicating the decision of GM's bondholders: Many large investors hold insurance policies known as credit default swaps. Such policies would reimburse bondholders if there is a bankruptcy filing.

Analysts speculated that few bondholders agreed to GM's offer because they differed with the company's view of its stock value.

Meanwhile, Germany pressed for an independent future for GM's Europe-based Opel unit. The foreign minister said "the lights must not go out" on Opel even as the parent company heads for bankruptcy.

Opel's supervisory board approved a plan to pool GM's European assets -- including plants, sales operations and patents but excluding Sweden's Saab brand -- for a new investor said Karin Kirchner, a spokeswoman for GM Europe.

GM would choose any new investor, but Germany would decide on whether a new owner would get further government assistance, and if so what kind

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