Monday, April 27, 2009

GM Bondholder Group Says Offer Isn’t ‘Reasonable’

General Motors Corp. bondholders find the automaker’s offer to exchange their $27 billion in debt for equity unreasonable and said they should be treated more equitably with labor unions.

“We believe the offer to be a blatant disregard of fairness for the bondholders who have funded this company and amounts to using taxpayer money to show political favoritism of one creditor over another,” the ad hoc committee of GM bondholders said today in a statement.

Bondholders are being asked to swap all their claims for 10 percent of the equity in the reorganized company. The offer is contingent on cutting at least half of GM’s $20.4 billion of obligations to a United Auto Workers retiree-medical fund, known as a Voluntary Employee Beneficiary Association, through a debt- for-equity exchange that would give the VEBA as much as 39 percent of common stock in the Detroit-based carmaker.

Without an accord, bondholders face the uncertainty of bankruptcy, GM Chief Financial Officer Ray Young said today. At least 90 percent in principal amount of the notes must be exchanged by June 1 to satisfy the U.S. Treasury, GM said today in a statement.

“This is an offer that’s designed to fail,” said Kip Penniman, an analyst at fixed-income research firm KDP Investment Advisors in Montpelier, Vermont. “To get 90 percent of them to agree to such a deal where there’s no cash, no other debt and pure equity while leaving the union VEBA arrangement unchanged from previous considerations is absurd.”

Government Aid

GM has received $15.4 billion in government aid and is trying to prove it’s viable, a U.S. requirement to keep the federal loans. The original loan terms called for GM to slash two-thirds of its bonds through an exchange offer and for the VEBA to reduce a cash contribution to $10.2 billion from $20.4 billion.

The bondholder committee, whose members include San Mateo, California-based Franklin Resources Inc. and Loomis Sayles & Co. of Boston, has been in contact with about 100 institutions representing about $12 billion of GM bonds, according to a person familiar with the discussions. The committee plans to try to negotiate a better offer, said the person, who declined to be identified because the talks are private.

GM has “limited” options to alter terms of the debt exchange and to consider the proposal as a “take it or leave it” offer wouldn’t be “too strong,” GM’s Young said today in an interview.

Few Options

The automaker has been given few options by the U.S. government to expand bondholders’ stake beyond 10 percent of the proposed 60 billion in new GM shares or otherwise increase the offer, he said. Bondholders need to weigh what they are giving up under the offer against improved marketing spending for surviving GM brands, potential profitability of dealers and efficiency of manufacturing in the revamped company, Young said.

The Obama administration’s auto task force ousted Chief Executive Officer Rick Wagoner last month, saying that GM’s plan to return to profit wasn’t aggressive enough, and ordered new CEO Fritz Henderson to cut the automaker’s debt by more than initially demanded. GM will be forced to go into a government- supported bankruptcy without deeper cost cuts from its creditors by June 1, the administration said.

“This offer demonstrates that the company and the auto task force, unfortunately, are pinning their hopes on an extremely risky and legally questionable turnaround in bankruptcy court, instead of engaging its lenders and workers in the very type of negotiations that could avoid such a fate,” the bondholders said in the statement.

Worse in Bankruptcy

GM bondholders may fare worse in bankruptcy, according to Shelly Lombard, an analyst in Montclair, New Jersey for bond research firm Gimme Credit LLC.

“You have a gun being put to your head saying that if you don’t take this, we have something that’s even worse for you,” Lombard said. “It looks like a raw deal for bondholders. I just don’t think they have the negotiating leverage to get anything better than what’s currently on the table.”

GM’s $3 billion of 8.375 percent bonds due in 2033 rose 1.75 cents to 10.5 cents on the dollar, according to Trace, the bond-price reporting system of the Financial Industry Regulatory Authority. The debt yields about 78 percent.

Exchange Conditional

Bondholders will be given 225 shares of GM common stock for each $1,000 in principal amount tendered and will also receive accrued interest in cash.

The proposed debt exchange is also conditional on the U.S. Treasury agreeing to exchange 50 percent of its loans at June 1, estimated to be $10 billion, for stock. The VEBA and the U.S. Treasury would own about 89 percent of the common stock in the reorganized GM after their debt exchanges, the statement said. The remaining 1 percent of stock would be held by GM’s existing common shareholders.

Before Wagoner was removed, GM had proposed that bondholders swap more than three-quarters of their stake for equity, according to a person familiar with the talks. That offer would have given bondholders 90 percent of the equity of the reorganized automaker and a combination of cash and new unsecured notes, the person said at the time.

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