Offer expands debtors’ stake in company on bankruptcy’s brink
WASHINGTON – By offering a sweetened deal Thursday to holders of $27 billion of General Motors’ bonds, the auto giant and the Obama administration are trying to follow Chrysler’s path to a quick exit from bankruptcy.
As GM rolls toward an expected Chapter 11 filing by Monday, a new, leaner and, the company hopes, profitable Chrysler is preparing to emerge from its own court-supervised restructuring. It figures to do so only a month after filing for bankruptcy, thanks to some crucial agreements it locked down beforehand with its union workers and some debt-holders.
GM would be the fourth-largest U.S. company to file for bankruptcy, and Obama administration officials hope that carefully packing for the trip to Bankruptcy Court will speed GM’s emergence.
“I don’t want to suggest with GM it’s going to be that surgical, that quick,” said a senior Obama administration official, who requested anonymity because of the sensitive nature of the negotiations. But he suggested that a new GM shorn of most of its debt could emerge in 60 to 90 days.
There’s a slim chance that GM won’t file for bankruptcy as the government’s restructuring deadline approaches. But GM’s new offer to bondholders assumes a bankruptcy proceeding similar to Chrysler’s, creating a new company with the automaker’s good assets and leaving most of the debt behind.
Doing so also would help the company break franchise agreements with the hundreds of dealers it’s trying to cut.
Coming a day after bondholders overwhelmingly rejected a deal for a small stake in GM, the new offer would give those debtors as much as 25 percent of the company – provided that they don’t contest the bankruptcy plan.
The latest offer is backed by the U.S. Treasury and has the probable support of about 35 percent of bondholders: 15 percent who accepted the earlier deal and 20 percent who agreed Thursday.
The government plans to provide GM with about $30 billion, on top of the $19.4 billion already given to the automaker, to get it through bankruptcy, according to the senior administration official. Existing shareholders would largely be wiped out.
In another potential signal that GM was preparing to file Chapter 11, the Obama administration announced it was dispatching eight Cabinet secretaries and other officials starting Tuesday to communities throughout the Midwest that depend on the auto industry. The officials will discuss federal efforts to help those communities deal with problems caused by the recession.
Auto sales have plummeted, pushing GM and Chrysler to the brink of failure. Demonstrating the industry’s continued troubles, Michigan auto-parts maker Visteon Corp. filed for bankruptcy protection Thursday.
Administration officials have been encouraged by the speed with which Chrysler has moved through bankruptcy and the willingness of consumers to buy the company’s vehicles during the process. Through last week, Chrysler’s percentage of U.S. auto sales had improved in May compared with the month before, when the company hit an all-time low, according to research company Edmunds.com.
“Basically they declared bankruptcy and sales went up, which is the complete opposite of what everybody thought,” Edmunds chief executive Jeremy Anwyl said. “People equate bankruptcy, liquidation and all these technical terms with deals. And there’s nothing like a deal to get people into the marketplace.”
In addition to reducing its debt, GM wants to obtain agreements with as many stakeholders as possible ahead of bankruptcy. It has reached a tentative contract with the United Auto Workers, whose members are expected to approve the contract in voting that ends today.
“The more you get agreed to beforehand, the better it works out,” said John A. E. Pottow, a University of Michigan law professor who specializes in bankruptcy.
He was initially skeptical that Chrysler could emerge in the 30 to 60 days that President Barack Obama had predicted. But he said deals struck before the filing, combined with Obama urging a quick resolution, have helped speed the process. Those dynamics should help GM meet the administration’s aggressive timetable as well, Pottow said.
Gaining goodwill from bondholders would be an important move toward that objective.
A large group of bondholders, representing about 20 percent of the total, said it supported the new offer because the alternative was “uncertain and costly bankruptcy court litigation.” An additional 15 percent of bondholders had agreed to the earlier proposal and are expected to accept the enhanced offer, said the senior administration official.
But not all bondholders were pleased. A group representing smaller bondholders cited “gross unfairness” in giving the UAW a much better return on its outstanding debt.
As proposed in a Securities and Exchange Commission filing, bondholders would receive 10 percent of the company’s shares after GM emerges from bankruptcy, along with warrants to purchase an additional 15 percent in new shares at a later date.
The government would receive an initial 72.5 percent stake in GM, with a retiree health care trust fund run by the UAW holding a 17.5 percent share. Separately, the government of Canada, which is expected to provide GM with about $9 billion in financing support in a bankruptcy, would get an undetermined amount of equity.
Bondholders have until Saturday afternoon to accept the deal. But, unlike the earlier proposal, which required 90 percent of bondholders to accept before it could be implemented, there is no set percentage needed for the latest offer, the administration official said. The administration will make a “judgment call” when the offer expires and decide if the participation is acceptable.
If not enough bondholders agree to the plan, however, their equity stake would be “substantially reduced or eliminated,” GM’s filing warned.
The GM that emerges from bankruptcy would have $17 billion in debt, far less than current levels.
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