GM to Bondholders: Want to Play?

Updated from 12:24 p.m. EDT

Now the immediate future of General Motors ( GM) is up to its bondholders.

CEO Fritz Henderson on Monday laid out a scaled-down viability plan that will eliminate the Pontiac brand, reduce dealers by 42% and cut the number of hourly employees by about 22,000 workers.

He said the plan, which reshapes GM into a company even smaller than the one envisioned in the Feb. 17 proposal to the Obama administration's auto task force, would enable the automaker to break even with annual North American vehicle sales of just 10 million.

"The objective is not to survive," Henderson said Monday on a conference call with reporters. "The objective is to develop a plan that allows us to win ... . With even a modest recovery in 2010, we believe we would turn profitable in 2010 on an EBIT basis."

The plan's enactment requires the three principal holders of GM debt -- the United Auto Workers, the federal government and the unsecured bondholders -- to swap debt for equity.

In an exchange offer launched Monday, the bondholders, who hold $27 billion in notes, are being asked to swap at the rate of 225 shares for every $1,000 of principal. They would then hold about 10% of the company. The Treasury has determined that about 90% of the bondholders need to accept the offer in order to avoid bankruptcy, GM says. The deadline is May 26 at 11:59 p.m.

"If GM seeks bankruptcy relief, note holders may receive consideration that is less than what is being offered in the exchange offers and it is possible that such holders may receive no consideration at all for their notes," GM warned in a prepared statement.

Said Henderson: "The bond exchange needs to be successful in order for us to avert bankruptcy. It's not impossible but I think it's a tough task." Bankruptcy therefore is "probable," he said.

The Treasury would accept at least 50% of GM's common shares in exchange for half of what it has lent GM this year, or about $10 billion in equity. That would likely make the government GM's largest shareholder. However, "Treasury has not indicated any interest in running the company," Henderson said. "They want to make sure the company is run well."

Meanwhile, the UAW would take equity for at least 50% of GM's obligation to a retiree health care trust fund, an amount valued at approximately $10 billion.

Combined, the Treasury and the union could initially hold as much as 89% of the shares in the new GM, although normally in a bankruptcy case, holders of the newly issued equity move fairly quickly to sell shares in order to begin to recoup their investment.

Current GM shareholders would retain 1% of the company. Shares of GM closed the day at $2.04, up 20.7%. Rival Ford ( F) added 2.2% to $5.11. Japanese competitors Toyota Motor ( TM) and Honda Motor ( HMC) declined more than 2% each.

Bondholders, however, don't like the company's latest offer. "We are deeply concerned with today's decision by GM and the auto task force to offer only a small, inequitable percentage of stock to its bondholders in exchange for their bonds," the advisers to the ad hoc committee of GM bondholders said late Monday in a prepared statement.

"We believe the offer to be a blatant disregard of fairness for the bondholders who have funded this company and amounts to using taxpayer money to show political favoritism of one creditor over another," the group said.

A major point of contention is that the Voluntary Employee Benefits Association, a retiree health care trust fund administered by the UAW, would get more than the bondholders. The bondholders said the VEBA would get 50% in cash and a 39% stake in the new GM for its $20 billion in obligations, while they would receive 10% of the restructured company for their $27 billion in bonds.

"This offer demonstrates that the company and the auto task force, unfortunately, are pinning their hopes on an extremely risky and legally questionable turnaround in bankruptcy court, instead of engaging its lenders and workers in the very type of negotiations that could avoid such a fate," the group said.

Under the revised plan, Pontiac would be phased out by the end of 2010, enabling GM to offer 34 different nameplates within the Chevrolet, Cadillac, Buick and GMC brands. The company had 48 nameplates in 2008.

The number of dealers would be lowered to 3,605 by the end of 2010 from 6,246 today. The reduction involves 500 more dealers than GM envisioned in the February plan, and it's occurring four years sooner.Hummer, Saab and Saturn would be sold or phased out this year

GM's new plan not only assumes lower vehicle sales, but also that GM's market share will be 19.5% in 2009, dropping to between 18.4% and 18.9% in subsequent years. Last week, GM announced it would slash this year's production by 190,000 vehicles in order to pare inventories.

The cuts will involve a reduction in the number of GM plants in the U.S. from 47 in 2008 to 34 by the end of 2010, a reduction of 28%.

Hourly employment would fall from about 61,000 in 2008 to 40,000 in 2010 and level off around 38,000 in 2011. The reduction involved 7,000 to 8,000 more workers than the Feb. 17 plan did.

GM said hourly labor costs would decline to $5 billion in 2010, down 34% from $7.6 billion last year. The company's structural costs would drop to $23.2 billion in 2010 from $30.8 billion in 2008. The reduction is $1.8 billion more than envisioned in the Feb. 17 plan.

More from Stocks

Week Ahead: Trade Fears and Stress Tests Signal More Volatility To Come

Week Ahead: Trade Fears and Stress Tests Signal More Volatility To Come

3 Great Stock Market Sectors Millennials Should Invest In

3 Great Stock Market Sectors Millennials Should Invest In

Why Millennials Are Ditching Stocks for ETFs

Why Millennials Are Ditching Stocks for ETFs

Trump's 'Space Force' Could Launch a $1 Trillion Industry, Morgan Stanley Says

Trump's 'Space Force' Could Launch a $1 Trillion Industry, Morgan Stanley Says

Abiomed Stock Should Rise Some 12% From Here, Piper Jaffray Analyst Says

Abiomed Stock Should Rise Some 12% From Here, Piper Jaffray Analyst Says