Better deal for GM debt holders

By offering a sweetened deal Thursday to holders of $27 billion of its bonds, General Motors Corp. and the Obama administration are trying to follow Chrysler's path to a quick exit from bankruptcy.

As GM rolls toward an expected Chapter 11 filing by Monday, a new, leaner and hopefully profitable Chrysler is preparing to emerge from its own court-supervised restructuring. It should do so only a month after filing for bankruptcy protection, thanks to some crucial agreements it locked down beforehand with its union workers and some debt holders.

GM would be the fourth-largest U.S. company ever to file for Chapter 11. Although it's much larger and more complex than Chrysler, Obama administration officials hope that carefully packing for the trip to Bankruptcy Court will speed GM's emergence.

"I don't want to suggest with GM it's going to be that surgical, that quick," said a senior Obama administration official, who requested anonymity because of the sensitive nature of the negotiations. But he suggested that a new GM shorn of most of its debt could emerge from bankruptcy protection in 60 to 90 days, much faster than most big companies.

There's a slim chance that GM won't file for Chapter 11 as the government's Monday restructuring deadline approaches. But GM's new offer to bondholders assumes a bankruptcy proceeding similar to Chrysler's, creating a new company with the automaker's good assets and leaving most of the debt behind.

Doing so would also help GM break franchise agreements with the hundreds of dealers it's trying to cut.

Coming a day after bondholders overwhelmingly rejected a deal for a small stake in GM, the new offer would give those debtors as much as 25% of the company -- provided they don't contest the bankruptcy plan.

The latest offer is backed by the U.S. Treasury and already has the likely support of about 35% of bondholders: 15% who accepted the earlier deal and 20% who agreed Thursday.

The government plans to provide GM with about $30 billion, on top of the $19.4 billion already given to the automaker, to get it through bankruptcy, the senior administration official said. Existing shareholders would largely be wiped out.

In another potential signal that GM was preparing to file for Chapter 11, the Obama administration announced that it was dispatching eight Cabinet secretaries and other officials starting Tuesday to communities throughout the Midwest that depend on the auto industry.

The officials will discuss federal efforts to help those communities deal with problems caused by the recession.

Auto sales have plummeted, pushing GM and Chrysler to the brink of failure. Demonstrating the industry's continued troubles, Michigan auto-parts maker Visteon Corp. filed for bankruptcy protection Thursday.

Although concerns exist about the harm that bankruptcy could do to GM, a restructuring looks less damaging given Chrysler's experience.

Administration officials have been encouraged by the speed with which Chrysler has moved through bankruptcy and the willingness of consumers to keep buying the company's vehicles during the process.

Through last week, Chrysler's percentage of U.S. auto sales had actually improved in May compared with the month before, when the company hit an all-time low, according to research firm

"Basically they declared bankruptcy and sales went up, which is the complete opposite of what everybody thought," Edmunds Chief Executive Jeremy Anwyl said. "People equate bankruptcy, liquidation and all these technical terms with deals. And there's nothing like a deal to get people into the marketplace."

In addition to reducing its debt, GM wants to obtain agreements with as many stakeholders as possible ahead of bankruptcy. It has already reached a tentative contract with the United Auto Workers union, whose members are expected to approve the contract in voting that ends today.

"The more you get agreed to beforehand, the better it works out," said John A.E. Pottow, a University of Michigan law professor who specializes in bankruptcy.

Pottow was initially skeptical that Chrysler could emerge from bankruptcy in the 30 to 60 days the Obama administration had predicted. But he said deals struck before the filing, combined with Obama publicly urging a quick resolution, have helped speed the process. Those dynamics should help GM meet the administration's aggressive timetable as well, Pottow said.

Gaining goodwill from bondholders would be an important move toward that objective.

A large group of bondholders, representing about 20% of the total, said it supported GM's new offer because the alternative was "uncertain and costly Bankruptcy Court litigation." An additional 15% of bondholders who had agreed to the earlier proposal were expected to accept the enhanced offer, the senior administration official said.

But not all bondholders were pleased. A group representing smaller bondholders dismissed the offer, citing "gross unfairness" in giving the UAW a much better return on its outstanding debt.

As proposed in a Securities and Exchange Commission filing, bondholders would receive 10% of the company's shares after GM emerges from bankruptcy, along with warrants to buy an additional 15% in new shares at a later date.

The government would receive an initial 72.5% stake in GM, with a retiree healthcare trust fund run by the UAW holding a 17.5% share. Separately, the government of Canada, which is expected to provide GM with about $9 billion in financing support in a bankruptcy, would get an undetermined amount of equity.

Bondholders have until 2 p.m. Pacific time Saturday to accept the deal. But, unlike in the earlier proposal, which required 90% of bondholders to accept before it could be implemented, there is no set percentage needed for the latest offer, the administration official said. The administration will make a "judgment call" when the offer expires and decide whether the participation is acceptable.

If not enough bondholders agree to the plan, however, their equity stake would be "substantially reduced or eliminated," GM's filing warned.

The GM that emerges from bankruptcy would have only $17 billion in debt, far less than current levels.

"Implementation of this proposal would result in a new GM with a healthy balance sheet, putting the new company on a clear path toward long-term viability and success," the company said.


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