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GM Will Lowball Bondholders -- Analyst

Analyst Kip Penniman said he expects the outcome of negotiations with bondholders and the United Auto Workers will be a pre-packaged bankruptcy filing by June 1.
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Updated from 1:19 p.m. EDT

General Motors


will begin a round of tough negotiations with bondholders this month, first making an offer it knows will fail and then threatening to spin off its most valuable assets into a separate company, according to a credit analyst's report.

KDP Investment Advisors analyst Kip Penniman said he expects the outcome of negotiations with bondholders and the United Auto Workers will be a pre-packaged bankruptcy filing by June 1.

The talks with bondholders will likely begin with a formal exchange offer from GM before April 30, Penniman wrote in a report issued Monday. "We expect the ownership stake offered to bondholders would be unattractive, maybe in the 20% range," he said. The offer "will fail, as designed, and set the stage for the next round of negotiations with bondholders."

In the meantime, Penniman anticipates that


will seek bankruptcy protection, ramping up the pressure on bondholders. "GM will hope that Chrysler's filing and the low-ball offer will set a serious and productive tone forthe next set of negotiations, (which will) turn towards a pre-packaged bankruptcy. We believe GM could achieve a greater than two-thirds reduction in its unsecured debt in a pre-packaged filing while negotiating significant concessions with the UAW."

Penniman also views discussions of a strategy to spin off the best GM assets into a separate company as an effort to pressure bondholders for a settlement. "We simply do not believe the plan could be implemented quickly enough to avoid significant damage to GM's value," he said. "Claimants including bondholders, the UAW, retirees, suppliers and vendors would all exercise their legal right to voice their arguments and bog down the process."

On a conference call with reporters on Friday, CEO Fritz Henderson acknowledged that so far, talks with bondholders have not moved rapidly. Before those talks could occur in earnest, he said, GM must revise its business plan, as the Obama administration's auto task force has requested: it must also engage in negotiations regarding a debt-for-equity swap with the Voluntary Employee Beneficiary Association retiree health care trust fund, which is administered by the UAW. However, the UAW is currently focused on talks with Chrysler, which has until April 30 to restructure under terms of its federal loan.

Regarding the bondholders, Henderson said: "In order for this deal to come together, we need to bring the bondholders and VEBA along roughly at the same time. The dialogue is ongoing (but) we don't have an agreement. They, like everybody, are (first) going to see what our business plan looks like."

Meanwhile, GM said Monday it will lay off 1,600 workers over the next few days.

"These are part of the 3,400 salaried reductions we said we would make this calendar year," said GM spokesman Tom Wilkinson. "We said the bulk of these would be by May 1."

The layoffs were announced in an email to employees from GM North American President Troy Clarke, who said they are needed to ensure the company's long-term viability. "In these unprecedented times, GM is reinventing every aspect of our business, including our organizational size and structure, to create a lean and agile company," Clarke wrote in the email, which was obtained by

The Associated Press

. Additional reductions are anticipated by June, Henderson indicated on Friday.

GM shares closed Monday at $1.66, down 20 cents.



shares finished down 31 cents to $3.69.