Harder Deal Terms Seen for GM Bondholders, UAW

The White House's auto task force thinks that GM's latest offers to bond holders and auto workers will leave the company with too much debt and want the terms reduced even further, CNBC has learned.

As of the end of the last week, as reported by CNBC, GM had two offers on the table ...

To the unions:

GM owes the unions $20 billion for their retiree healthcare benefits. (This is called VEBA—

General Motors Headquarters
General Motors Headquarters

voluntary employee beneficiary association.)

As of late last week, GM was offering them $10 billion in cash, amortized over 20 years, and $10 billion in preferred stock with a 9% coupon.

To the bondholders:

GM owes the bondholders approximately $27 billion dollars and had offered them two choices.

Choice 1: 8 cents in cash, 16 cents in new unsecured debt, and 90% of the equity in GM.

The second choice remains unclear, but it too includes 90% of equity in the new company.

Now those offers are likely to be revised.

With a dramatic fall in car sales to an annualized rate of around 9 million cars a year, down from more than 16 million cars a year, the White House believes those previously offered deals still leave the GM’s balance sheet loaded with too many liabilities.

The Administration Monday, while unveiling a plan aimed at reviving car sales, hinted that the deal terms would have to change. In a fact sheet handed out in conjunction with President Obama's discussion of the GM situation early Monday, the White House said:

“The restructuring must substantially reduce GM’s outstanding debt and existing liabilities to a level where they are consistent with both its normalized cash flow and the cyclical nature of its business. Given the deterioration in the auto market since late last year, this will require substantially greater balance sheet concessions than those called for in the existing loan agreements.”

The existing loan agreements refers to the term sheets put out last December when then President Bush extended a loan to GM. That term sheet said the company’s debt must be reduced by at least two-thirds through conversion into equity or new debt, and that at least half of GM’s retiree health care benefits liability had to be paid to the unions with some form of company stock instead of cash.

Some debt market participants believe the auto task force could come back to the bondholders and tell them they will receive only equity and no unsecured debt as part of the offer.

The ad hoc committee of GM bondholders said in a statement Monday afternoon that "bondholders have been and remain willing to reduce GM’s future debt burden by exchanging a substantial part of their debt for equity, but that exchange must occur in support of a business plan that has a chance to succeed."

The bondholder group, though, said that it so far has been "very disappointed that the government and company have had virtually no real dialogue with bondholders while designing the proposed restructuring plan."

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