GM bankruptcy becomes nearly certain as offer to bondholders fails
General Motors Corp. (NYSE:GM) said today that a majority of its bondholders had refused to exchange their $27 billion in debt for equity in the company, making a bankruptcy filing for the automaker nearly certain within days.
GM said its board of directors, headed by interim chairman Kent Kresa, would meet this week to discuss its immediate options.
The automaker, under pressure from the federal government, has repeatedly said that it would be forced to file a Chapter 11 petition if it could not slash its debts.
GM last month offered to swap 225 shares for every $1,000 in bonds, a deal many bondholders publicly criticized from the outset. Under the plan, bondholders would get 10% equity in a restructured GM in exchange for at least $24 billion in debt, a much less generous deal than that offered to the government and the United Auto Workers union in the restructuring process.
The bond-exchange failed to attract the necessary approval from bondholders before the offer ended at 11:59 p.m. Eastern time Tuesday, GM said.
"The principal amount of notes tendered was substantially less than the amount required by GM to satisfy the debt reduction requirement," the automaker said in a statement.
As a result, the automaker said it would void the tender offer completely and would not execute any of the swaps. It did not specify how many bondholders had accepted the offer.
Later today, roughly 60,000 members of the United Auto Workers union who are employed by GM will begin voting on a new contract with the automaker. The vote will conclude Thursday evening.
If approved, it would clear the way for the federal government to receive a majority stake -- as much as 70% equity -- in exchange for the $19.4 billion it already has lent to GM and probably tens of billions of dollars more in financing to get the company through bankruptcy.
The UAW would get a 17.5% stake in the company, plus warrants for an additional 2.5%, in exchange for forgiving more than half of GM's $20-billion cash obligation to a retiree healthcare trust fund run by the union.
Bondholders would get about 10%, with the Canadian government, which has said it would lend GM some money through the bankruptcy process, receiving a smaller, as yet undetermined stake in the reformed company.
The exact percentages were still in flux, said a source familiar with the government's negotiations with GM and its stakeholders.
The Obama administration's deadline for GM to restructure is Monday, and the source said a bankruptcy filing was looking increasingly likely.
The Treasury Department is expected to be GM's primary backer in a bankruptcy, a process that could require as much as $50 billion in additional loans, according to reports. That could place GM among the largest recipients of government bailout funding to date.
When Chrysler filed for bankruptcy last month, it did so at the urging of the government, which has to date lent it $7.8 billion. It may emerge from bankruptcy protection as early as next week.
A GM filing could come before the end of the week and as late as Monday, though it is not expected to occur until after the UAW concludes the vote on a new contract.
In addition to reducing GM's costs to fund the retiree healthcare, the agreement allows for a new buyout offer to GM's hourly workers and significant reductions in vacation pay and other workplace benefits. In exchange, GM would take back operations of five plants owned by bankrupt parts supplier Delphi and would commit to producing small cars in at least one idled factory.
If that contract passes, as is widely expected, it will remove a major hurdle to restructuring and could smooth what would otherwise be a very complicated, drawn-out bankruptcy process.
GM executives have said that spending more than one or two months in bankruptcy court could have disastrous effects on the company's sales and relationships with suppliers and other vendors.
GM has hundreds of subsidiary units and it remains unclear which would also enter bankruptcy. When Chrysler filed Chapter 11 last month, its Canadian unit, for example, did not.
Today, GM moved to consolidate its European operations, including Vauxhall and Opel, under its Adam Opel unit in Germany. That would simplify the ongoing sale of those divisions and could also serve to protect them from a bankruptcy filing by GM.
Opel has attracted three serious bidders -- Canadian supplier Magna, Italian automaker Fiat, and Brussels buyout firm RHJ International. A decision on a preferred purchaser by the German government, which will lend Opel money to restructure under new ownership, is expected this week.