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Obama Making Big Political Bet on GM

Ted Reed

President Barack Obama has hitched his presidency to the fate of General Motors(GM Quote).

Events Thursday made it more clear than ever that the administration, not the automaker's management, is driving GM -- some are calling it "Government Motors" -- into bankruptcy court. After the reorganization, the Treasury will initially own 72.5% of the company.

Obama is expected to talk about GM on Monday, the day of a widely anticipated bankruptcy filing, said press secretary Robert Gibbs. An administration official, rather than GM executives, briefed reporters on details Thursday. Additionally, the White House announced that eight cabinet members, as well as other top administration officials, will travel throughout the Midwest Tuesday through Friday to try to sell the plan, or, as its statement said, "to discuss federal recovery efforts for auto communities and workers."

Meanwhile, as it prepared to file what may be the most historic bankruptcy in U.S. history, GM had little to say Thursday, issuing a terse press release headed "GM Statement on U.S. Treasury's 363 Sale Proposal."

The statement began: "The U.S. Treasury proposal announced today provides incentives for GM's unsecured bondholders to support GM's restructuring efforts in the event GM decides to pursue a 363 sale as part of a bankruptcy proceeding." (A 363 sale is an expedited bankruptcy filing in which a company spins off viable assets into a new company.)

The company said it "appreciates the unwavering support of the U.S. Treasury and the President's Task Force on Autos."

The tentative deal brokered by the Treasury means that unsecured bondholders will back the bankruptcy filing in return for 10% of the equity in a new GM, as well as warrants to purchase up to 15% more. Their support would enhance the prospect for rapid bankruptcy court approval.

The Voluntary Employee Beneficiary Association, a retiree health care trust fund administered by the United Auto Workers, would hold 17.5% of the new company. The remaining 10% would go to "the old GM," and be distributed to the bondholders. The Treasury's 72.5% share would at some point be converted to equity.

The Treasury, which already has lent GM $19.4 billion, would provide $30 billion more in financing required to keep the company operating during the court process. The Canadian government is expected to provide an additional $9 billion.

The Ad Hoc Committee of GM Bondholders, which represents holders of about 20% of the $27 billion in unsecured GM debt, said it supports the revised offer because it provides them "the opportunity to recover a greater portion of their original investment than was previously offered.

"While the committee continues to remain troubled by preferential treatment that the UAW VEBA is receiving compared to the bondholder class -- rejecting this offer in the expectation that the bondholders will do better in a litigated outcome was a risk the Committee is unwilling to take," the group said in a prepared statement.

Bondholders have until 5 p.m. Saturday to formally agree to the deal, with a Chapter 11 bankruptcy filing expected on Monday, June 1. The case is expected to take 60 to 90 days to resolve.

About 15% of bondholders agreed to the previous proposal, said an administration official, according to The Associated Press. Approval by the bondholders committee and other large debtholders has brought the total to 35%.

However, Main Street Bondholders, an advocacy group representing a few hundred small bondholders, said it continues to oppose the deal because the VEBA gets a 66% share of its claim, while small bondholders would get only 13% of theirs. The group said it will seek membership on the creditors committee.

"We have a large and growing concern of small bondholders, especially seniors and Baby Boomers who will receive next to nothing under this deal, and we want to ensure that the bankruptcy process is fair to everyone," said Jim Martin, president of the 60 Plus Association, organizers of the bondholders coalition, in a prepared statement.

Among the changes in the new plan, the Treasury would "advance substantial additional funds to GM and convert approximately $40 billion of this into common equity in the new GM, vastly improving the balance sheet of the company and substantially increasing its equity value," the bondholders group said. Also, the Treasury "is converting approximately $30 billion of additional debt into equity, relative to what was disclosed in the original S4 [filing]," the group said.

GM stock was briefly halted in NYSE trading before reopening Thursday. Shares closed Thursday at $1.12, down three cents. They traded as high as $1.42 during the day, but traders gradually became more cognizant that despite the deal with bondholders, the shares are still headed to zero as GM issues new equity in bankruptcy.

In a report on Thursday, Standard & Poor's equity analyst Efraim Levy reiterated a strong sell opinion, saying that even though 10% of the company would go to the "old GM," under bankruptcy law, "lower claims, such as stockholders, cannot get paid before higher claims, such as secured bondholders, receive 100% payment."

The new GM would have about $17 billion in debt, including $8 billion owed to the Treasury, $6 billion in other debt and $2.5 billion owed to the VEBA, according to an SEC filing. It would issue $9 billion in preferred stock paying 9% interest, with $2.5 billion held by Treasury and $6.5 billion held by the VEBA.