The Treasury Department and a committee of major bondholders at General Motors have reached a deal that could give creditors a larger stake in GM than previously offered. But bankruptcy is still likely in the next few days despite the deal.
The agreement, revealed in a Securities and Exchange Commission filing by GM (GM, Fortune 500) early Thursday, would essentially give the bondholders 10% of the company but also give them the rights to buy an additional 15% of the company’s stock at a low price.
The deal is unlikely to allow GM to avoid bankruptcy, however. If anything, it might clear potential obstacles to the government’s plans to use bankruptcy as a way to turn around the nation’s largest automaker. That’s because bondholders accepting the new offer agreed not to fight the government’s plans for a quick bankruptcy at GM.
As part of such a filing, GM would emerge with only its more profitable plants, brands, dealerships and contracts. GM’s unprofitable plants, contracts and other liabilities that the company can no longer afford would be left behind in bankruptcy court.
According to Thursday’s filing, the new offer is structured so that the portion of GM that would remain in bankruptcy would receive a 10% stake in a "new GM" that would be used to pay bondholders. The old GM would also receive the right to buy the 15% stake in the new company that emerges from bankruptcy.
The bondholders would likely receive the overwhelming majority of the old company’s assets, including the shares in the new company, as part of the bankruptcy process.
In the original offer to bondholders, creditors would only receive a 10% stake in a new GM.
The filing also disclosed that GM will not repay the loans it has already received from the government or much of the additional federal aid it will get as part of the bankruptcy.
The government has already given GM $19.4 billion to fund operations and cover losses this year, and total help is expected to exceed $50 billion.
GM will pay back $8 billion of that sum. The government will also receive $2.5 billion in preferred shares of GM that pay a dividend and are more similar to a loan than stock.
But more than $40 billion of federal help to GM will be converted into a 72.5% stake in the new company. This means that for taxpayers to make back any of the money loaned to GM, it will have to be because shares of the new GM increase dramatically in value following an exit from bankruptcy.
A senior administration official conceded Thursday that while the Treasury Department hopes the new GM will be financially viable even if auto sales remain weak, it will be difficult for taxpayers to recover its full investment in GM.
"I don’t know how much we’re going to recover," he said.
A trust fund run by the United Auto Workers union would also have a 17.5% stake in the new GM, as well as the right to buy an additional 2.5% stake. UAW President Ron Gettelfinger said earlier this month the company hopes to sell its stake in GM as soon as possible.
But the administration official said that it is unlikely GM’s stock will be publicly traded while the company is in bankruptcy. Even though the "new GM" could emerge from bankruptcy in two to three months, the process for the assets remaining in bankruptcy could last between 6 and 18 months.
That will make it difficult for the government and the union trust fund to quickly sell their shares in GM.
According to GM’s filing, advisors to the unofficial committee of major bondholders which accepted the deal hold about 20% of $27 billion in unsecured bonds cheap payday loans.
The administration official said that about 15% of the bondholders not represented by the committee accepted the original deal. The official added it will now be up to the committee to round up additional support from other bondholders.
The remaining bondholders have until Saturday afternoon to indicate whether they support the new offer. But the administration official said there is no particular threshold of support for the new deal that needs to be achieved.
The official said Treasury will look at which bondholders have accepted the deal and which different classes of investors they represent to determine whether there is "sufficient" support. GM had previously said it needs approval from 90% of these creditors in order for any offer to take effect.
About 20% of the bonds are held by individual investors, with the rest owned by institutional investors, including pension funds, endowments and bond funds. A group representing some of the individual investors issued a statement Thursday afternoon saying the deal was still not fair, and vowed to fight the reorganization plan in bankruptcy court.
But the bondholders’ committee said in its own statement that the government’s decision to convert more of its debt into equity was one of the factors that led it to endorse this new deal, along with the chance to have a larger stake in the company.
GM is expected to have about $17 billion in debt following bankruptcy, significantly less than the $54.4 billion it owed as of March 31.
The committee said the reduced debt burden on the new GM "gives the bondholders the opportunity to recover a greater portion of their original investment than was previously offered." But the committee also acknowledged that bondholders, who hold debt that is not backed by company assets, had little choice but to accept the deal.
"Rejecting this offer in the expectation that the bondholders will do better [in bankruptcy court] was a risk the committee is unwilling to take," the committee said in its statement.
In its own statement, GM said it "appreciates the unwavering support of the U.S. Treasury and the President’s Task Force on Autos and thanks the unofficial committee of bondholders for their support of the proposal."
GM faces a June 1 deadline to make $1 billion in interest payments to its bondholders, money the company says it does not have.
The company also faces a government-imposed deadline on that day to reach a restructuring plan or file for bankruptcy. While the company has continued to insist it hopes to avoid bankruptcy, a filing is still widely believed to be inevitable — even with Thursday’s agreement with bondholders.
The plan to have the healthy parts of GM leave the bankruptcy process quickly as a slimmed down entity is similar to what is now taking place with GM rival Chrysler LLC, which was pushed into bankruptcy by the government last month. The judge overseeing that case is hearing motions on that plan this week.
Bob Schulz, senior auto credit analyst for rating agency Standard & Poor’s, said that if GM follows Chrysler into bankruptcy, the new company will clearly emerge with a more manageable debt level. Still, he said it is too soon to say just how a new GM will do going forward.
"We’ll have to see the whole plan of reorganization, what exactly gets left behind," he said, adding that the outlook for auto sales remains uncertain.