GM Bondholders Reject Exchange Plan, Bankruptcy Now Looks Certain

GM will likely file bankruptcy in the next 48 hours

By Brendan Moore

05.27.2009

gm-logo-small3GM has been trying to get bondholders to participate in a debt-to-equity swap, and those efforts were pronounced a failure late yesterday. GM hoped that 90% of the bondholders would forgive debt in exchange for a 10% ownership in the restructured company. Reports indicate that interest in the plan among the target population was approximately 8% of all the bondholders.

A resounding defeat, but it’s worth noting that no one thought that GM’s plan would succeed. It is obvious that GM was merely going through the motions of introducing the exchange offer and then recording the results so that they could get on with Plan B.

GM did reach an agreement with the UAW today that greatly reduced the company’s labor and pension/healthcare costs. Which, just as a heads-up, is exactly what happened immediately before Chrysler filed bankruptcy. In addition, and perhaps more importantly, the new agreement restructured GM’s payments to the trust fund which funds retiree health care.

The UAW did not really have much choice. They certainly didn’t hold back in their assessment of GM.

“GM today stands at the very brink of bankruptcy,” the union stated in a handout distributed to GM workers that was designed to inform members of the new terms of the labor agreement and the trust fund payments.

The GM shareholders that have remained were treated even worse in the GM offer – their outstanding shares would be a mere 1% of the proposed new company. If GM declares bankruptcy, their shares will have no value.

There is some good news for GM’s secured lenders, however. According to the Wall Street Journal, the bankruptcy plan that is being finalized as I type this grants the secured lenders a full recovery of their various loan amounts.

The plan also calls for GM to emerge from bankruptcy with approximately $11 billion USD in debt. GM currently has around $88 billion USD of debt.

The US Treasury plans to inject another $50 billion dollars into GM to get it through bankruptcy, and as it has been noted before, will then own 70% of GM after a successful discharge of the federal bankruptcy.

Bankruptcy would also allow GM to void any dealer agreements it wished; a definite plus for the company’s plans to cut its dealer ranks. Without the protection of federal bankruptcy, GM would be subject to state dealer franchise laws that contain onerous terms for any manufacturer that terminates a dealer franchise agreement.

COPYRIGHT Autosavant – All Rights Reserved

Author: Brendan Moore

Brendan Moore is a Principal Consultant with Cedar Point Consulting , a management consulting practice based in the Washington, DC area. He also manages Autosavant Consulting, a separate practice within Cedar Point Consulting. where he advises businesses connected to the auto industry. Cedar Point Consulting can be found at http://www.cedarpointconsulting.com.

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7 Comments

  1. It’s going to be a very difficult process, but there is no other choice at this point.

    I’m thinking it might happen today. It should have happened a year ago, GM could be out of bankruptcy now.

  2. Just think how better off GM would have been if they declared bankruptcy 12 months ago. It’s too good to even imagine.

  3. In hindsight, GM probably should’ve gone bankrupt 10 years ago, but I don’t think anyone (especially the UAW and the government) would have supported it, and management would have been vilified.

  4. The previous two comments are correct; GM should have declared bankruptcy years ago (probably even as far back as 1991 or so when it last got so close to it), but there was zero sense of urgency at the time. It’s safe to say that had the current situation not come to pass, the UAW would not be in such a “giving” mood in terms of concessions. It’s been a very sick company for a long, long time, but is worse than ever at this point (obviously).

  5. I never would have thought this even a month ago, but I think Chrysler is going to come out of bankruptcy in better shape than GM. I think they waited way too long to go BK.

  6. Looks this is going to happen regardless of bondholder actions because the bondholder agreed to terms this afternoon and GM says they’re still. Talking bankruptcy.

  7. I disagree with most of you. Had GM gone into BK last year or even six months ago, it would have been uncontrolled and quickly led to Chapter 7 liquidation. THe path staked out by the Obama administration is much more orderly and (likely) quick than ordinary BK proceedings. Certainly, neither GM nor Chrysler would have received DIP financing–one of many things blazing a path to Chapter 7. I think that this gives GM a chance–its last, best chance–to shed decades of sludge and emerge with its best bits ready to go.

    GM’s best is world class. Once the dead weight is removed, it will be competitive. I hope that selling most of Opel turns out well. I understand that the German gov’t has essentially forced the sale, but losing your well-regarded stronghold in the world’s largest car market does not seem like a wise move.

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