GM unlikely to strike crucial deal with bondholders
Inching ever closer toward bankruptcy, General Motors Corp. appeared late Tuesday to have come up short in a bid to slash 90% of its debt even as it zeroed in on new concessions from its labor union.
The troubled automaker is expected to provide an update today on the progress of its attempt to get bondholders to swap most of their $27 billion in debt for a 10% stake in the company, an offer many creditors have said they would refuse.
GM executives have said that if the bond exchange tender offer does not succeed, the company will have no choice but to file Chapter 11 by June 1. This month, Chief Executive Fritz Henderson said a filing was “more probable” considering the process of the negotiations.
GM had set a deadline of the end of the day Tuesday, though a company spokesman left open the possibility of granting bondholders an extension. Such a delay could provide GM and the U.S. government the chance to sweeten the offer.
That would be made possible by the automaker’s new contract with the United Auto Workers union, details of which were revealed Tuesday. If ratified, the agreement would give the union a 17.5% stake in a restructured GM rather than the previously proposed 39%, potentially allowing bondholders to take a larger position in the company.
Talks among the Obama administration, GM and its bondholders are continuing, said a source familiar with the discussions who requested anonymity because he was not authorized to speak publicly. Those discussions recently have been “far more constructive and orderly” than before, according to the source.
Also at issue, the source said, was how much of a stake to give the government of Canada, which has offered to help finance GM’s bankruptcy.
At the same time, another key stakeholder, the United Auto Workers union, was preparing to vote on a tentative contract designed to keep the company solvent.
In exchange for a 55% reduction in cash obligations to a UAW retiree trust, GM would grant the union a 17.5% share in the company, along with $6.5 billion in preferred stock, a $2.5-billion note and warrants for an additional 2.5% of the automaker, according to union representatives who have reviewed the tentative contract.
Under the new scenario, as much as 70% of GM would fall to the government, which has lent the automaker $19.4 billion and probably would lend it several times more than that in a bankruptcy.
If approved, the agreement would in effect hand the federal government a controlling stake in one of the world’s largest industrial companies.
Leaders of union locals voted unanimously Tuesday to recommend ratification, and members will vote on it today and Thursday. The deal also includes cost concessions affecting vacation pay, relief time and workplace rules.
George McGregor, president of UAW Local 22 in Detroit, said he was expecting his 1,500 members to approve the contract.
“The mood is to bring it on so we can move forward,” McGregor said. “I call this agreement a ‘pacemaker.’ It’s something to keep your heart going until you get a new heart.”
On Monday, the Canadian Auto Workers union membership ratified a new contract of their own, further reducing GM’s labor costs.
Increasingly, however, it is the bondholders, and not the unions, that present the biggest obstacle.
The automaker made the tender offer in April, proposing to swap 225 shares for every $1,000 in bonds. Critics said the deal significantly undervalued their debt in comparison with that held by other stakeholders -- they would be getting 10% for $24 billion, while the U.S. Treasury would get at least 50% for significantly less debt forgiveness.
Bondholders made a counter proposal that would give them 58% of the company in exchange for their debt, with the UAW and existing shareholders holding the rest. GM ignored the offer.
In the meantime, GM creditors, many of them individual investors who purchased $25 retail bonds in recent years, have loudly protested the plan.
The majority of GM bonds, however, are held by institutional investors and speculative traders, many of whom bought the debt at a discount.
Many bondholders believe they could get a better deal from a bankruptcy judge than under the proposed deal.
But because the government will provide the financing for the bankruptcy process, some experts predict the creditors could find the same deal forced on them by a bankruptcy judge.
Last month, Chrysler, which has received $7.8 billion in federal bridge loans, filed for bankruptcy in New York. It has since moved swiftly to create a new company, merged with Italian automaker Fiat and unsaddled of billions of dollars in debt -- despite the objections of its lenders -- so that it can exit bankruptcy soon.
A GM filing could dwarf that of Chrysler. Because of its size -- annual revenue tops $100 billion -- a GM filing would be considerably more complex and expensive than Chrysler’s.
In February, GM said that Chapter 11 could cost as much as $100 billion. The Obama administration has not finalized how much money it would provide to GM to get the automaker through bankruptcy.
Even if GM avoids bankruptcy, it still has a lot of work to do. The company plans to reduce its U.S. dealership network by 42% in the next 18 months while cutting its hourly workforce in North America to 38,000 by 2014, compared with 61,000 in the first quarter of this year. It will sell its European Opel division, reduce the number of models it sells and focus on only four brands in the U.S.: Chevrolet, Cadillac, Buick and GMC.
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jim.puzzanghera@latimes.com
