GM Said to Plan All-Equity Offer for Bondholders

zhyangi

By Caroline Salas and Jeff Green

April 16 (Bloomberg) -- General Motors Corp. is planning to make a formal offer to all bondholders by April 27 to exchange their $27.5 billion in claims for equity, according to a person with knowledge of the discussions.

GM, facing a June 1 deadline for a U.S.-backed bankruptcy, was told this week by President Barack Obama’s auto task force to try to restructure its debt out of court, said people familiar with the matter, who asked not to be identified because the talks are private.

The Detroit-based automaker is planning to announce the offer within 11 days, because the U.S. Securities and Exchange Commission requires that investors have a month to decide whether to participate, according to one of the people. Bondholders also may be offered accrued interest in cash, though the terms of the exchange are preliminary, the person said.

“Our bet would be the bondholders would probably go into court because they’ll be able to get more concessions,” said Mirko Mikelic, senior portfolio manager at Fifth Third Asset Management in Grand Rapids, Michigan. “You’re going to get equity anyways. You might as well hold out until you can get more concessions” from management and the unions.

The Obama administration said last month that GM’s plan to return to profit wasn’t aggressive enough and ordered new Chief Executive Officer Fritz Henderson to cut its 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.

Proving Viability

GM is trying to prove it’s viable, a U.S. requirement to keep $13.4 billion in federal loans. The original loan terms called for GM to slash two-thirds of its bonds through a debt- for-equity exchange. GM also needs the United Auto Workers to agree to cut a cash contribution to a union retiree health-care fund to less than $10.2 billion from $20.4 billion.

The UAW retiree health-care fund will probably get preferential treatment over other unsecured claims in GM’s restructuring because GM needs a cooperative union to build its vehicles once it reorganizes, according to people familiar with the plans.

Thousands of Bondholders

GM has thousands of bondholders ranging from institutional investors including insurers and pension funds to individual retirees. A 10-member ad hoc committee of bondholders, whose members include San Mateo, California-based Franklin Resources Inc. and Fidelity Investments of Boston, has rejected two plans they’ve been shown since December.

“A successful bond exchange is an essential element of our restructuring efforts, and we are working aggressively to launch the exchange,” Renee Rashid-Merem, a GM spokeswoman, said. “However we won’t speculate on timing or terms of the transaction.”

A spokeswoman for the U.S. Treasury, Jenni Engebretsen, didn’t immediately respond to an e-mail.

Before CEO Rick Wagoner was removed last month, bondholders were balking at a proposal from GM that called for them to 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 in the reorganized automaker and a combination of cash and new unsecured notes, the person said at the time.

Equity for U.S.

The U.S. government is also considering swapping some of the $13.4 billion it loaned GM for an equity stake in a stripped-down version of the carmaker, people familiar with the matter said. A government stake would mean a smaller share of the new company for bondholders.

GM’s $3 billion of 8.375 percent bonds due in 2033 rose about 0.7 cent to 9.25 cents on the dollar at 3:45 p.m. in New York, according to Trace, the bond-price reporting system of the Financial Industry Regulatory Authority. The debt yields 89 percent.

GM also may drop its Pontiac and GMC brands as it seeks deeper cuts, people familiar with those discussions said. The largest U.S. automaker had originally planned to sell or close its Saab, Saturn and Hummer brands.

Chrysler LLC, facing an April 30 deadline to restructure and form an alliance with Fiat SpA, has been negotiating with its secured lenders and the United Auto Workers union. The Auburn Hills, Michigan-based automaker borrowed $4 billion from the U.S.

Obama said Chrysler, the third-largest U.S. automaker, could borrow as much as $6 billion more to restructure if it teams up with Fiat.