The clock is ticking for GM. If an agreement with the bondholders and the unions is not reached by June 1, GM is headed for bankruptcy court. If the deal is approved as currently on the table, the Treasury department would become GM’s largest shareholder.

Bankruptcy looks increasingly likely as 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.”

Bondholder Math

The Market Cap of GM is $1.25 billion. The administration wants bondholders to forfeit $27 billion in debt obligations in return for equity shares worth a mere $125 million (10% of $1.25 billion).

Can anyone blame bondholders for walking away?

Conflicts for Government

The Wall Street Journal is reporting Control Would Create Conflicts for Government.

The government could be exposed to a host of conflicts and potential unintended consequences if it ends up — as now appears likely — with a controlling stake in General Motors Corp.

Under GM’s latest restructuring plan, the U.S. would get at least a 50% stake in the largest Detroit auto maker. Even without a majority stake, the government was able to use its muscle in March to oust GM Chief Executive Rick Wagoner. But such a major holding would turn GM into a sort of Government Motors, making the federal government the company’s de facto boss and bank lender.

A direct stake could create other uncomfortable conflicts: The Obama administration would be setting emissions and mileage standards for cars in Washington while having to implement them in Detroit. It also would make the government a direct partner of the United Auto Workers, which would get a 39% stake in the company under GM’s latest blueprint for survival.

A final GM plan is still many months away, and early reaction from bondholders suggests that the plan won’t come together in its current form. But even if it flops, the proposal reveals that the government, in close consultation with GM, is prepared to become more deeply immersed in the operations and rehabilitation of the auto maker.

Both the Bush and Obama administrations have grappled with how to shore up the economy without getting directly involved in running companies. They were unable to avoid an entanglement with insurer American International Group Inc., in which the government now owns an 80% stake after committing more than $170 billion in emergency relief. It will soon own more than a third of banking giant Citigroup Inc., with which it has had a sometimes-fraught relationship.

But in contrast with those cases, the GM proposal comes as part of an all-out administration effort to restructure the U.S. auto industry, including the country’s third-largest car company, Chrysler LLC.

“The big question is whether the government, as a shareholder, will be focused on GM making money, or it making clean and green cars, or whatever other political agenda they have for the auto space,” says Peter Kaufman, president and head of restructuring at investment bank Gordian Group LLC.

The Treasury’s current plan is to hold its GM ownership stake in some form of trust, say people briefed on the situation. The administration’s auto team is now drafting documents that lay out how that trust and its government-appointed trustees will manage the government’s majority stake.

Still unclear is how long the government would maintain its ownership, these people say. There are differing views in the administration, with some advocating a quick sale of the stake while others argue the government needs to take a long-term view and hold GM for a long time to get a better price. One administration official said the government would likely sell its shares gradually, but only after GM had regained its financial moorings and rebuilt its reputation.

GM to Eliminate 21,000 Jobs

The New York Times is reporting G.M.’s Latest Plan Envisions a Much Smaller Automaker.

For all the uncertainty swirling around General Motors, the troubled automaker said Monday that one thing was clear: it must become drastically smaller if it hopes to remain a viable company, regardless of whether it has to file for bankruptcy.

G.M. said it would eliminate another 21,000 factory jobs, close 13 plants, cut its vast network of 6,500 dealers almost in half and shutter its Pontiac division.

By the time it is finished, G.M. expects to have only 38,000 union workers and 34 factories left in the United States, compared with 395,000 workers in more than 150 plants at its peak employment in 1970.

Where once G.M. had a 50 percent share of the market for new vehicles in the United States, the company hopes to at least hang on to its current 18 percent share.

Analysts warned that even those projections could be optimistic. “There is still a huge risk for market share losses beyond what the company is forecasting,” said John Casesa, an industry consultant.

G.M., however, still faces difficult odds of restructuring outside of bankruptcy court.

The company is still negotiating with the United Automobile Workers union. The government wants the union to accept company stock to finance half of G.M.’s $20 billion obligation for retiree health care.

If bondholders approve the debt-for-equity exchange, they would own about 10 percent of G.M., making them a minority shareholder in a company controlled by the Treasury and the U.A.W.’s retiree trust.

According to the offer, the Treasury would own at least 50 percent of G.M. in exchange for forgiving about $10 billion in federal loans. The union trust, in turn, would receive a stake of about 39 percent.

A committee of big G.M. bondholders on Monday called the offer a “a blatant disregard for fairness for the bondholders” and an example of “political favoritism” toward the U.A.W. “The current offer is neither reasonable nor adequate,” the committee said.

Representative Thaddeus McCotter, a Michigan Republican, is concerned that some bondholders want the company to go bankrupt because they also hold credit-default swaps insuring them against losses.

He is urging the Treasury secretary, Timothy F. Geithner, to disclose which G.M. bondholders have default swaps from the American International Group, the insurance company that was bailed out by the government.

“It would be unconscionable to use taxpayer money to help people benefit from the bankruptcy of General Motors,” Mr. McCotter said.

Deal Recap

If the deal goes through as currently proposed….

  • The Treasury (taxpayers) would be stuck with 50% of GM’s equity (currently worth $625 million) in exchange for forgiving about $10 billion in federal loans.
  • The UAW would get 39% of GM’s equity (currently worth $488 million) in exchange for giving up $10 billion in health care benefits
  • Corporate bondholders would get 10% equity (currently worth $125 million) in exchange for giving up $27 billion in bonds.

Under the above agreement there is still a missing $10 billion piece of the puzzle: “The government wants the union to accept company stock to finance half of G.M.’s $20 billion obligation for retiree health care as noted above.

What happens to the other $10 billion? Does it vanish into thin air? My guess is this would be dumped on taxpayers via the Pension Benefit Guarantee Corporation (PBGC)

Everybody loses but the credit default swap holders. Now who might that be? JPMorgan, Goldman Sachs, and/or Citigroup by any chance?

Mike “Mish” Shedlock
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