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GM Bondholders Reject Debt-For-Equity Deal, Bankruptcy Imminent

GM announced this morning that its attempt to persuade bondholders to exchange $27 billion in debt for a 10% equity stake in the restructured company had failed, essentially ensuring that GM will enter into bankruptcy protection next week.

"The exchange offers expired at 11:59 p.m. EDT on May 26, 2009, at which time 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, to meet the debt reduction objectives under its viability plan, or to meet the minimum tender condition of the exchange offers as required by the U.S. Treasury," the company said in a statement.

Convincing 90% of its bondholders as well asits unions to make serious concessions was the biggest requirement GM faced in order to receive more aid from the Obama administration and avoid bankruptcy. While the unions agreed to substantial cuts, bondholders balked at the offer, considering it to be far lower than what they were owed. While the unions initially were offered up to a 39% stake in a restructured GM and later settled for 20%, bondholders have been offered no more than 10% of the company in exchange for their debt. GM has maintained that the government has prevented it from offering anything more to the bondholders.

Anonymous sources told Reuters that the actual bondholder take rate for the deal was considerably lower than the 90% requirement and may have been as low as a single-digit percentage. Sources also said that the Obama administration considered the deal fair but would still be willing to work with the bondholders.

It was revealed earlier this week that GM's unions had agreed to scale back their equity stake in a restructured GM from 39% to just 17.5% of common stock, but would have a warrant for another 2.5% of the company's stock. The unions alsowould get $6.5 billion in preferred stock and a $2.5-billion note from the Treasury. The purpose of these payments is to cover roughly half of the $20 billion that GM owes to the VEBA retiree benefits trust.

The question then becomes: What happened to that other 19% of the company that the unions gave up? It appears to have gone not to the bondholders but to the government. Reports now indicate that instead of taking a 50% stake in GM, the U.S. Government could control up to 69% of the new company in order to reduce the company's debt, a good portion of which is owed to the government to cover the $19.4 billion in emergency loans the company has already received and the billions more the government will provide to finance the company's bankruptcy.

When the Obama Administration ushered rival Chrysler into bankruptcy last month, the president chastised a group of lenders that had refused to accept a deal they considered unfair and GM's bondholders have received similar criticism. But are the bondholders really to blame? Credit research firm CreditSights released a report on the matter today blasting the government for offering the bondholders a pittance compared to what the unions have been offered.

"Casting a lopsided, outrageously unbalanced deal as a major concession is still more of the same Jedi Mind Tricks even if the tricks are aimed more at public perception than the bondholders," CreditSights said in its report. "For most bondholders, this is a fight worth having. The terms are as egregiously unfair and lopsided now as they were before with the risk-reward symmetry still very much skewed against the largest pre-bankruptcy creditor."

According to CreditSights, the final goal of GM's restructuring plan has always been "the destruction of the bondholders' claims as the end game." The agency went on to say that leaked information about the talks between GM and the government has been part of an "orchestrated attempt" to cast the deal in a positive light.

Other analysts speculated that GM's bondholders could be hoping for a bankruptcy filing, in which case they could recover up to 40% of what they're owed. Other creditors may hold insurance polices on loansthat would cover what they're owed in the event of a bankruptcy filing.

Few, if any, analysts believe that GM will be able to continue to avoid filing for bankruptcy now that the bondholders deal has fallen through. GM said in a statement that its board will be meeting to discuss the company's next step, butit only has until next Monday to restructure the company before the Obama administration cuts funding and pushes the company into bankruptcy court. Without a deal in place with the bondholders, GM's bankruptcy proceedings could be much longer and more heated than Chrysler's, which were streamlined thanks to pre-bankruptcy deals. Analysts have already predicted that GM's bankruptcy filing will be the largest and most complicated in U.S. history.

Source: GM, The Associated Press, Reuters Story 1 and Story 2

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