Pimco Backs Out of GM Debt-for-Equity Swap

A major bondholder has pulled out of talks regarding a debt-for-equity exchange with General Motors(GM Quote).

The withdrawal by Pacific Investment Management Co., or Pimco, presents a challenge as GM negotiates against a deadline tied to its receipt of $13.4 billion from the Troubled Asset Relief Program. By March 31, the automaker must demonstrate it can get sufficient concessions from bondholders, the United Auto Workers and others.

"PIMCO's withdrawal from the creditor committee suggests that negotiations are already unraveling amongst bondholders," wrote KDP Investment Advisors analyst Kip Penniman, in a report.

"We're just not good committee members," Bill Gross, Pimco's co-chief investment officer, told Bloomberg News, in an interview. "We have the interests of our clients more at heart than the interests of particular corporations or even the government, I guess, so it's best that we simply look at the situation from afar as opposed to from inside."

Based on September filings, Bloomberg said Pimco owned more than $138 million of GM's $27.5 billion in bond debt.

If GM can't get needed concessions, the government can call the loans, likely forcing the company into bankruptcy, which would likely disadvantage bondholders. Nevertheless, Penniman wrote: "We commend PIMCO's withdrawal from the committee as we see several major flaws in the present negotiations."

Among them, he said, leaving the committee enables Pimco to freely trade its bonds: access to insider information prevents committee members from trading. Also, issuing new equity to bondholders seems problematic, given that GM's existing equity could be canceled as part of a restructuring. Also, he said, the United Auto Workers union is seeking preferential treatment.