GM Bankruptcy ‘Inevitable’ as Bondholders Spurn Offer

A General Motors Corp. bankruptcy filing became almost certain after the 100-year-old automaker failed to persuade enough bondholders to take equity in a streamlined company in exchange for $27 billion of debt.

The debt-for-equity swap offer by GM, the world’s largest automaker until its 77-year reign ended last year, failed to win the required 90 percent approval of bondholders by the time it expired last night. The proposal was part of an effort by the Detroit-based company to cut its debt by $44 billion before a June 1 deadline in order to qualify for more bailout loans.

“The expiration of General Motors’ exchange offer makes a bankruptcy filing inevitable,” said Richard Hahn, co-chairman of the bankruptcy practice at Debevoise & Plimpton LLP, a New York law firm that isn’t involved in the GM negotiations.

The formal decision on whether to file for bankruptcy protection is “up to the GM board to decide and that meeting is later in the week,” a GM spokeswoman, Julie Gibson, said today, declining to disclose the timing of the session.

GM, following Chrysler LLC into bankruptcy, has said it would use a court-protected reorganization to start a new company with just its viable assets, such as its Cadillac and Chevrolet brands.

The automaker, a victim of tumbling car sales and higher fuel prices, has said it will stop making Pontiac models and sell its Hummer and Saturn brands, while dropping as many as 2,400 U.S. dealers by the end of 2010. Its Saab Automobile unit is under the protection of a Swedish bankruptcy court, and its Opel unit in Germany is up for sale.

Bankruptcy Financing

The U.S. plans to fund GM’s trip through bankruptcy with financing expected to be closer to $30 billion than $50 billion, a person familiar with the negotiations said. The amount of so- called debtor-in-possession financing is a moving target, as are the equity stakes to be held by the U.S. and Canadian governments, the person said.

GM’s equity would be majority-owned by the U.S. Treasury once the automaker’s restructuring plan is in place, said another person familiar with the discussions, who wouldn’t estimate the government’s ownership percentage in the company.

The U.S. and Canadian governments may have equity ownership of as much as 69 percent. GM has proposed giving bondholders a 10 percent stake in the reorganized company and current shareholders 1 percent. GM also has agreed to provide as much as 20 percent of shares to a health-care trust fund for union retirees.

Billions in Loans

GM has taken $19.4 billion in U.S. Treasury loans and was seeking billions more. To qualify for the money, it had to meet government-imposed tests. It succeeded in reducing $20.4 billion owed to the union’s fund, which consented to take 17.5 percent of the new company’s shares, plus preferred stock and debt.

GM originally planned to give the trust as much as 39 percent of the new equity, with 50 percent going to the U.S., its largest lender, and 1 percent for existing shareholders.

The offer to bondholders, which would have given the investors 10 percent of the new company, was designed to meet a second U.S. government test for more bailout loans. The original government loan terms called for GM to get bondholders to give up two-thirds of their debt for new equity.

“It’s no surprise at all that a deal that was as unattractive as this one would be soundly rejected,” said Pete Hastings, a fixed-income analyst at Morgan Keegan & Co. in Memphis, Tennessee.

‘Imminent’

Bankruptcy is “imminent,” said Hastings, who urged his clients to refuse the exchange offer.

President Barack Obama’s spokesman said the administration’s automotive task force will continue to press for an accord among GM stakeholders until the June 1 deadline to qualify for more bailout loans.

“The deadline is near but it’s not passed yet,” press secretary Robert Gibbs said. “The team continues to work on getting all the stakeholders involved.”

GM’s restructuring may be more difficult than Chrysler’s because GM has thousands of bondholders including individual retirees, while Chrysler was negotiating with a smaller group of institutional lenders, according to Christopher Garman, chief executive officer of debt research firm Garman Research LLC in Orinda, California. Chrysler listed more than 100 secured lenders in bankruptcy court documents.

‘More Complicated’

“GM is certainly more complicated,” Garman said. “In a debt restructuring, it’s a lot like herding cats and the more cats there are the more difficult it is. GM does have a lot of individual holders and traditionally the more concentrated holdings are, the easier it is to achieve some sort of agreed- upon plan.”

GM was founded in 1908 by William “Billy” Durant, who bought more than 20 car companies to create it. By 1962, the automaker accounted for 51 percent of the U.S. vehicle market, the peak of its dominance.

GM sold 8.35 million cars worldwide in 2008, losing its place as the No. 1 automaker to Toyota Motor Corp. as customers opted for the Japanese carmaker’s fuel-efficient Corolla and Camry brands instead of GM’s light trucks and Hummers.

North American sales were $86.2 billion in 2008, compared with $34.4 billion in Europe, $20.3 billion in Latin America, Africa and the Middle East, and $17.8 billion in the Asia Pacific region, according to a regulatory filing.

Dow Ouster

GM will be removed from the Dow Jones Industrial Average should it file for bankruptcy, according to John Prestbo, who helps oversee the stock-market measure. The effect will be minimal following GM’s 97 percent plunge on the New York Stock Exchange since October 2007.

The automaker represents 0.13 percent of the Dow, the least among 30 companies in the 113-year-old gauge. Based on yesterday’s close of 8,473.49 for the Dow, GM’s ouster would push it down by 11 points.

GM shares fell 29 cents to $1.15 at 4:15 p.m. in New York Stock Exchange composite trading. The stock has lost 64 percent this year.

GM’s $3 billion of 8.375 percent bonds due July 2033 decline 0.63 cent, or 8 percent, to 7.13 cents on the dollar to yield 115 percent as of 3:14 p.m.

Any significant market impact from the filing, which is set to occur by June 1, is unlikely, said Hastings, the Morgan Keegan analyst.

“It’s largely baked in,” he said. “Long-term GM bonds are trading at pennies on the dollar in anticipation of the filing and have been there for a while. The broader market may react to the headline. It’s like watching a train wreck in a horror film: You see it coming down the tracks. There might be an initial negative reaction but it’s pretty well anticipated.”