GM says bondholder offer fails; bankruptcy likely

A General Motors Corp. (NYSE: GM) bankruptcy filing seemed inevitable after a rebellion by its bondholders forced it to withdraw on Wednesday a plan to swap bond debt for company stock.

GM has until Monday to complete a government-ordered restructuring that includes debt reduction, labour cost cuts and plant closures. But a Chapter 11 reorganization is likely after the company said its offer to exchange $27 billion in unsecured debt for 10 per cent of the company's stock had failed. GM has received $19.4 billion in federal loans.

GM shares lost 17 cents, or 11.8 per cent, at $1.27 in morning trading.

John Pottow, a professor at the University of Michigan who specializes in bankruptcy, said GM evading bankruptcy now is almost impossible.

``They said no. That's it. They tried. That's why they're going to have to file for bankruptcy,'' Pottow said.

GM spokesman Tom Wilkinson said the board will meet later this week to decide its next move, but he would not say exactly when. He also would not say if the company would soon file for Chapter 11, nor would he reveal what percentage of bondholders took the offer.

``The principal amount of notes tendered was substantially less than the amount required by GM to satisfy the debt reduction requirement under its loan agreements with the U.S. Department of the Treasury,'' GM said in a statement issued Wednesday.

The Obama administration has said it would only provide more funds if 90 per cent of the bondholders, as well as unionized workers, agreed to concessions that substantially reduced GM's costs.

Observers have said it is likely that should GM file for bankruptcy protection in the U.S., it will not file in Canada, similar to troubled rival Chrysler. That did not insulate Chrysler's Canadian plants, which shut down after the idling of its U.S. plants forced many parts suppliers to close as well.

GM has already said its assembly plants in southern Ontario, including a car plant in Oshawa and a joint-venture plant with Suzuki in Ingersoll, won't be affected by a nine-week rotating shutdown in the U.S. However, it's likely its parts plants in St. Catharines and Windsor will be forced to close temporarily due to a lack of demand for their products.

GM has already cut its Canadian workforce heavily, with the recent closure of a pickup truck plant in Oshawa eliminating 2,600 jobs. It now employs about 7,500 hourly workers in Canada, and plans a shutdown next year of a transmission plant in Windsor which employs 1,400.

The Canadian Auto Workers reached a deal last week with GM that freezes workers' pension benefits until 2015 and slashes labour costs by $15 to $16 an hour through cuts to benefits.

GM also gave up its special status under Ontario law, which has allowed it to underfund its pension plan since the 1990s, and agreed to begin topping it up immediately. 

CAW president Ken Lewenza has said the deal is unlikely to be affected by a GM bankruptcy filing.

GM also said it cancelled meetings set for Wednesday with holders of notes that were not sold in U.S. dollars. The statement said the meetings were to discuss amendments to the debt-for-equity offers, but it did not specify what the amendments were.

There was a small hope Tuesday that GM could avoid a bankruptcy filing when the United Auto Workers union disclosed that it would take a 20 per cent stake in GM _ down from the original plan of 39 per cent. That seemingly freed 19 per cent of the Detroit-based company's shares to sweeten the pot for its recalcitrant bondholders.

Wilkinson would not say why GM didn't make the offer to bondholders more attractive.

Because the bondholder deal did not go through, the equity freed by the UAW deal now apparently will go to the U.S. government, which may have to commit billions more for GM's restructuring in court.

The government's stake in the company originally was to be 50 per cent, according to GM's regulatory filings. But it now could be as high as 69 per cent. The Canadian government also could get equity for up to $8 billion in aid for the automaker.

Such an arrangement would leave bondholders back where they started _ and a Chapter 11 filing all but certain. The deadline for GM's bondholders to tender their debt was midnight Tuesday.

Meanwhile, crosstown rival Chrysler LLC heads to court Wednesday to ask a bankruptcy judge for permission to sell the bulk of its assets to a group headed by Italy's Fiat Group SpA in hopes of saving itself from liquidation. Attorneys for Chrysler maintain that the Fiat deal is the company's only hope to avoid being sold piece by piece, but car dealers, bondholders, former employees and others are protesting what they see as the government speeding Chrysler through the bankruptcy process without regard for certain creditors.

Chrysler filed for bankruptcy protection April 30, after the government ended talks with a group of holdout bondholders.

Automakers worldwide are struggling as the global recession has reduced demand for new vehicles. But GM and Chrysler have been particularly hobbled by promises to cover the health and pension costs of tens of thousands of unionized retirees _ along with recent record-high gasoline prices that reduced demand for their low-mileage trucks and SUVs.

The UAW disclosed Tuesday it agreed to take a much smaller 17.5 per cent stake in GM, plus a warrant for an added 2.5 per cent stake to partially fund the $20 billion that GM must put into a trust that will start paying retiree health care costs next year.

In exchange for agreeing to a lower equity ownership stake, GM promised the union $6.5 billion of preferred shares that pay nine per cent interest, plus a $2.5 billion note. The union, facing the possibility that it may not be able to quickly sell GM shares to fund its trust, preferred the certainty of the $585 million annual dividend that accompanies the preferred shares.

The remaining $10 billion will come from health care trust funds that GM already has set up. The trust will get a seat on GM's board as well, although it will have to vote at the direction of GM's other independent directors. The concession deal, on which roughly 61,000 workers will vote by Thursday, also froze wages and cut retiree health care benefits, performance bonuses and cost-of-living raises.

When GM announced its debt exchange last month, the company offered bondholders 225 shares of common stock for every $1,000 in debt _ or a 10 per cent stake in the restructured company. In addition to the UAW's share, the federal government was to take 50 per cent for exchanging a combined $20 billion of their debt to equity. Current stockholders would end up owning just 1 per cent of the company.

A committee representing GM's biggest bondholders _ mostly big banks and other institutional investors _ has opposed the debt-for-equity swap from the start.

Smaller, ``retail'' bondholders _ individual investors like retirees and families _ have also railed against the terms of the exchange. Both groups say the offer gives them too small a stake for the amount they are owed.

GM had said previously that the government was preventing it from offering bondholders more than 10 per cent of the restructured company.
Some analysts said GM's bondholders may be holding out for better terms in bankruptcy.

Another factor complicating the decision of GM's bondholders: Many large investors hold insurance policies on their bonds known as credit default swaps. Such policies would reimburse bondholders in the event of a ``credit event'' like a bankruptcy filing.

Analysts speculated that few bondholders agreed to GM's offer because they differed with the company's view of its stock value.

``They clearly have different valuation opinions as to how much the shares are worth,'' Pottow said. ``If you're bullish on the prospects of the company, you might think that's a great deal. If you're bearish on the prospects of the company, you might not think that's a great deal.
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