GM bondholders panel agrees to sweetened offer

May 28, 2009

DETROIT (AP) -- General Motors Corp. said Thursday a committee of bondholders has agreed to a sweetened deal proposed by the U.S. government to erase the automaker's unsecured debt in exchange for company stock.

The news came in a regulatory filing that spells out the Obama administration's game plan for what it hopes will be a speedy Chapter 11 bankruptcy reorganization that will leave the U.S. government as the dominant GM shareholder with a much smaller debt load.

A person familiar with GM's plans said it was "probable" that the company would file for bankruptcy protection on Monday. The person didn't want to be identified because the plans were still under discussion with the U.S. and Canadian governments.

The government proposal is similar to the approach taken in the bankruptcy reorganization approach used by Chrysler Corp. Its plan to shed assets and sell control of a downsized carmaker to Fiat, aided by government financial assistance, could receive final approval from a bankruptcy court judge in New York before the end of the week.


The government's goal for GM is to eventually return it to profitability, allowing it to eventually sell its shares. But the risks for taxpayers are daunting, with U.S. auto sales near their lowest level in 27 years.

"We will come out of this rid of some of the historic legacy costs that have been dragging us down for the last 20 years or so," GM Vice Chairman Bob Lutz said Thursday at an Automotive Press Association luncheon in Detroit. "We will come out of it with an all new focus on product development."

The revised offer to the holders of $27 billion in unsecured GM bonds amounted to a take-it-or-leave-it ultimatum: Go along with what the government auto task force's proposal or be left holding the assets a new GM doesn't want -- ones with presumably little value at all.

In addition to the 10 percent of the stock in a newly formed GM that was originally rejected by bondholders, the new offer would give them warrants to acquire an additional 15 percent stake at a deep discount. That would come only if they agree to support selling the company's assets to a new company under bankruptcy court protection.

The Securities and Exchange Commission filing said that if the bondholders don't agree to support the sale, then the amount of stock and warrants they get would be substantially reduced or eliminated.

Under the proposal, which has a deadline of 5 p.m. Saturday, GM would enter bankruptcy protection and its good assets would be separated from bad ones.

The U.S. Treasury, which already has lent GM $19.4 billion, would get 72.5 percent of the new company's shares and provide unspecified billions of dollars in additional financing needed to keep GM operating while its reorganization plan is reviewed by a bankruptcy court judge.

A United Auto Workers' retiree health care trust fund will get 17.5 percent and the old GM, effectively owned by the unsecured bondholders, would get a 10 percent stake.

The plan envisions the slimmed-down new GM, shorn of more plants and brands, would have $17 billion in long-term debt and $9 billion in debt-like preferred shares. That would represent a 61 percent decline from its existing debt load of about $67 billion.

Only $8 billion of the existing U.S. government loans would remain on the books; the remainder would be converted into equity and preferred shares of the new GM.

A bondholders committee and other large debtholders agreed to the deal but still called it unfair. They collectively hold about 20 percent of GM's unsecured debt.

"While the committee continues to remain troubled by preferential treatment that the UAW VEBA is receiving compared to the bondholder class -- rejecting this offer in the expectation that the bondholders will do better in a litigated outcome was a risk the committee is unwilling to take," the committee said in a statement.

The deal would wipe out GM's $27 billion in unsecured bond debt, converting to equity a total of $50 billion in company debt.

GM's filing said that if the deal goes through, the new GM would emerge with a total of $17 billion in debt -- $8 billion owed to the U.S. government, $2.5 billion to the UAW trust and $6.5 billion in mainly overseas and capital lease debt.

It was unclear what would happen to the GM's current $6 billion worth of secured debt, but the person familiar with the GM plan said the U.S. government will provide financing to operate the new company and for the old GM to be liquidated.

An Obama administration official said the holders of GM's $6 billion in secured debt would be fully repaid. The official did not want to be identified because the plans had not been made public.

Trading of GM shares was halted for a short time Thursday morning, but resumed to rise 6 cents, or 5.2 percent, to $1.21 in midday trading.

An Obama administration official said the agreement is an important step in GM's restructuring and said the government's auto task force "will continue efforts to help ensure that GM emerges from restructuring as a strong, viable company that can operate independent of government support."

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