The US government is increasingly likely to convert a $13.4 billion loan to General Motors into common stock, sharply reducing the company's debt burden and giving taxpayers a major stake in the struggling auto maker, sources tell CNBC.
The move, which is still under discussion, is partly aimed at getting GM's bondholders and the United Auto Workers union to make more concessions and avert a possible bankruptcy filing, these sources said. The government is pressuring the UAW to make concessions on GM retiree health benefits.
People involved in the talks caution that nothing has been decided yet. Officials from President Obama's auto task force and the UAW had no comment.
The US agreed to loan GM up to $13.4 billion in December provided the auto maker convinced bondholders and the UAW to accept much of what the company owes them in stock rather than cash.
So far, both groups have balked. Both the union and bondholders are worried that if they accept stock, and the company goes bankrupt anyway, they will be left with nothing.
However, if the government converts its loan to equity, it signals to both groups that the White House will not let the company fail, and that the stock will eventually be worth something.
GM owes the UAW $20 billion for its retiree health care benefits, and it owes bondholders $27.5 billion.
Crucial to all of this: a new business plan for GM that reflects the current economic environment. That means fewer plants, fewer models, lower pay for union employees and a balance with far less, if any, debt. If that cannot be achieved, President Obama has said that forcing the company into bankruptcy is a strong possibility.
Previously, GM offered the bondholders 8 cents in cash, 16 and half cents in new debt, and 90% of the company's equity. It offered the union $10 billion amortized over 20 years, and $10 billion in preferred stock with a 9% interest rate. However, the auto task force told GM those offers were too generous because of the unprecedented and precipitous decline in auto sales.
Those previous offers were based on the assumption that auto sales would return to an annual pace of around 11 million cars. Thus far however, they have hovered around 9 million cars per year.
As CNBC reported more than a week ago, GM is planning to offer the bondholders no cash, no new debt, and only as much as 20% of the stock of GM, perhaps even as little as 10%. Again, negotiations are ongoing and nothing has been finalized. Terms of a possible offer could change on a daily or even hourly basis.
Reuters reports they are considering offering the unions only stock as well. If true, that would sit very poorly with the union, as it needs cash to pay for retiree health care benefits. Doctor visits and MRIs can't be paid for with stock.
However, the union retiree benefit plan does have some cash. GM had already paid them $10 billion out of $30 billion owed to them, late last year. Some argue that would justify paying the rest that is owed to them in stock, which down the road they could sell, and use to pay retiree health care benefits.