Winning Over Bondholders: Key to GM's Survival

GM bondholders fear that even with a bailout, the carmaker may not avoid bankruptcy. They want their money now

The clock is ticking for General Motors (GM). Next week the struggling automaker has to submit its restructuring plan to the Obama Administration to get the billions it needs to stay out of bankruptcy. But it may be even tougher to win over GM's bondholders.

The bondholders may end up being GM's most intransigent obstacle. The reason is that some among the diversified group of bondholders, which include such large institutional investors as Franklin Resources (BEN) and Fidelity Investments, are not convinced that they should take the company's offer to reduce their holdings by 70% in exchange for stock in the company. Others have their own demand that GM wrest more concessions from the United Auto Workers before they cut a deal.

If enough of them refuse to be part of the debt restructuring, they could throw a wrench in GM's plan to get the remaining $4 billion of a $13.4 billion loan package and keep the $9.4 billion it has already received in bailout funds. GM also needs to win concessions from the UAW, get its creditors to slash its $63 billion in debt, and show how it will be a viable company. Says Deutsche Bank Securities analyst Rod Lache: "There's a lot of risk that this won't happen. That's why we have GM's stock at a target price of zero."

Bondholders Not All Keen on Equity

Here's why. When GM presented its plan to Congress on Dec. 2, President and COO Frederick A. Henderson said GM would offer a debt-for-equity exchange, trading enough stock to get the company's debt from $63 billion down to about $30 billion. Unsecured creditors would take notes worth 30¢ on the dollar and stock.

But sources close to a committee representing many bondholders say some creditors aren't all that keen to get equity in GM and they would like a smaller discount on their bonds. GM's stock may not rebound, and in a bankruptcy their stock holdings would be wiped out.

Whether GM can get its unsecured creditors, who collectively hold $31.5 billion of its $63 billion in debt, to renegotiate may depend on what the UAW is willing to give. GM has already talked about giving the UAW equity for half of the $20 billion the company owes the union for a retiree health-care trust fund.

Unsecured Creditors at Risk

Sources close to some bondholders say that they are unhappy the UAW is being offered 50¢ on the dollar for its GM debt while they are being offered 30¢ on the dollar. "The bondholders are furious that the UAW could swap its debt for equity at 50¢," says Sean McAlinden, chief economist at the Center for Automotive Research.

There is talk among some bondholders that they may be able to get 30% on their holdings in bankruptcy court, but the judge may force a tougher restructuring than the government. So they would end up with equal value bonds, but in a company that has been restructured more severely. It is unclear which bondholders are digging in since they are not talking publicly. But Lache says some of them have insured their bonds with credit default swaps, which pay out the principal if GM can't pay the premium. Those note holders have less incentive to agree to a deal, Lache says.

But getting them to take GM's offer will depend on whom they believe. Some bondholders bought the debt at between 12¢ and 25¢on the dollar. They already are making a nice return since they bought the bonds so cheaply, and they figure they could break even in bankruptcy court. Others are saying they can do better in bankruptcy court. But McAlinden thinks that such talk is just posturing. They will have a tough time recouping the 30% that GM has offered. Says McAlinden: "Bankruptcy judges can be rough on unsecured creditors."

Vendors Ahead of Creditors?

They're also standing in line behind quite a few other lenders. GM has $11.8 billion in secured debt. Those borrowers come first. Next comes government claims for the $9.4 billion already given to GM by the Treasury Dept. If GM submits a satisfactory plan to the Obama Administration on Feb. 17, Treasury will loan GM another $4 billion. The Energy Dept. may give GM $6 billion in financing to retool plants to make more efficient cars. The bondholders get paid after them. All told, GM could have $80 billion in debt if it doesn't get its current liabilities restructured, Lache says.

Plus, many of GM's suppliers may be deemed essential vendors by a bankruptcy judge and would get paid before any creditors, says Don Workman, a bankruptcy attorney with Baker & Hostetler in Washington. While bondholders held out in recent cases like that of parts maker Metaldyne for a better deal, Workman thinks that "they're rattling the saber for a better deal," he says.

Some of the bondholders plan to push for more union concessions before they accept a deal. GM is already locked in talks with the UAW over possible concessions. UAW President Ron Gettelfinger does not want to open the 2007 labor contract, McAlinden says. The union already dropped the jobs bank, a paid-furlough clause that gives workers most of their pay when they are laid off. The union is also conceding jobs through buyout programs.

Skilled Trades Workers May Go

But other concessions like health-care benefits and job classifications are being discussed. Right now, 23% of GM's workforce is composed of skilled trades workers such as electricians, plumbers, and the like who make more than line workers. Toyota's (TM) plants get by with half that level. So GM may want to get rid of some of those workers.

In any case, it looks like GM, the UAW, and bondholders will have some time to hash things over. President Obama has not named a car czar yet. So even though GM plans to get its application in on Feb. 17, there may not be anyone to review it.

Lache says some GM bondholders will take the deal. Whether GM can get all of the debt restructuring it needs just depends on how many.

Welch is BusinessWeek's Detroit bureau chief.