GM Bondholders Concerned Over Lack of Progress

GM bondholders sent a letter to Treasury Secretary Timothy Geithner and the leaders of the auto task force Sunday expressing frustration that they have received no response from either GM or the auto task force regarding their suggestions for a near $28 billion debt exchange.

As part of the US government's recent bridge loan to GM, the company is required to reduce its debt from $27.5 billion to $9 billion. The company wants debt holders to hand in their bonds and accept stock of far lesser value.

Advisors to some of the bondholders call the current offer unfair because it requires them to take a much larger financial hit than many of the other constituencies in the restructuring including the unions and suppliers. The union is being asked to accept 50 cents worth of stock for every dollar owed to them by the company for their healthcare benefits, while bondholders are only getting 30 cents under the current plan.

Bondholders argue if the suppliers, dealers and unions don't sacrifice even more, the company will not survive and the stock they are given will become worthless.

In the letter, the advisors argue that many retail investors will be hurt by the terms of the deal on the table.

"GM bondholders are not a collection of 'Wall Street banks.' Many of these bonds are owned by average citizens, who purchased them to support their own retirement and college expenses and other critical needs," the letter says. "Most of these bonds were issued when GM was an investment grade rated company as a safe way for individuals and conservative institutions to invest for the future."

Some $5 billion of GM bonds were offered in increments as low as $25, suggesting they were bought by individuals. In addition, GM's bonds are held by many pension funds and mutual funds. Calpers, Franklin Resources, and PIMCO are some of the biggest holders.

Steven Rattner, head of the auto task force recently described the bondholders as "being difficult," causing anger among many of the debt holders.

Today's letter is seen as a response to his statements. In the letter they argue that GM is being far too optimistic about the future level of car sales. In addition, they suggest that if others aren't forced to make bigger sacrifices now, then not enough bondholders will participate forcing the company into bankruptcy regardless.

They want the White House to consider a proposal in which the US government would secure any securities given to bondholders who turn in their debt. Unknown is how much they are asking for in terms of dollar amounts.

"Keeping lines of communications open is the only way we all can meet the March 31 deadline for a debt-to-equity exchange," the letter said. "We are disappointed that we have had no response to our proposal from either GM or the auto task force."

The letter on behalf of GM bondholders was signed by advisers to an ad hoc committee negotiating a debt restructuring with the automaker prompted by the terms of its $13.4 billion bailout.