GM, Bondholders Pave Way for a Smoother Bankruptcy

The deal, in which unsecured bondholders would get 10% of the equity in a new GM, would help speed up the bankruptcy process, which is expected to start June 1.
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Updated from 10:40 a.m. EDT

General Motors

(GM) - Get Report

says it has reached a tentative deal to file for bankruptcy protection with the support of its unsecured bondholders, who would get 10% of the company.

The bondholders would get 10% of the equity in a new GM as well as warrants to purchase up to 15% more in return for not opposing the government-sponsored reorganization plan, enhancing 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, while 72.5% would go to initially to the Treasury, which would convert its holdings to equity. The remaining 10% would go to "the old GM," apparently to be distributed to the bondholders.

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.

"Implementation of this proposal would result in a new GM with a healthy balance sheet, putting the new company on a clear path toward long-term viability and success," GM said.

The company said that it "appreciates the unwavering support of the U.S. Treasury and the President's Task Force on Autos and thanks the unofficial committee of bondholders for their support of the proposal."

Bondholders have until 5 p.m. Saturday to formally agree to the deal, with a Chapter 11 bankruptcy filing expected on Monday, June 1.

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. At midday, shares were up about 10% to $1.27. 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.