April 27 (Bloomberg) -- General Motors Corp.
bondholders find the automaker’s offer to exchange their $27 billion in debt for equity unlikely to succeed, according to a person familiar with the committee representing creditors.
That’s because the offer by GM, the biggest U.S. automaker, treats bondholders worse than other claimants, such as unions, said the person, who declined to be identified because the discussions are private. At least 90 percent in principal amount of the notes must be exchanged by June 1 to satisfy the U.S. Treasury and avert a bankruptcy, GM said today in a statement.
Bondholders are being asked to swap all their claims for 10 percent of the equity in the reorganized company. The offer is contingent on cutting at least half of GM’s $20.4 billion of obligations to a United Auto Workers retiree-medical fund, known as a Voluntary Employee Beneficiary Association, through a debt- for-equity exchange that would give the VEBA as much as 39 percent of common stock in the Detroit-based carmaker.
“This is an offer that’s designed to fail,” said
Kip Penniman, an analyst at fixed-income research firm KDP Investment Advisors in Montpelier, Vermont. “To get 90 percent of them to agree to such a deal where there’s no cash, no other debt and pure equity while leaving the union VEBA arrangement unchanged from previous considerations is absurd.”
Government Aid
GM has received $15.4 billion in government aid and is trying to prove it’s
viable, a U.S. requirement to keep the federal loans. The original loan terms called for GM to slash two-thirds of its bonds through an exchange offer and for the VEBA to reduce a cash contribution to $10.2 billion from $20.4 billion.
The bondholder committee, whose members include San Mateo, California-based Franklin Resources Inc. and Loomis Sayles & Co. of Boston, hasn’t yet come up with a formal response and expects to try to negotiate a better offer, the person said. The committee has been in contact with about 100 institutions representing about $12 billion of GM
bonds, according to the person.
GM bondholders may fare worse in bankruptcy, according to
Shelly Lombard, an analyst in Montclair, New Jersey for bond research firm Gimme Credit LLC.
“You have a gun being put to your head saying that if you don’t take this, we have something that’s even worse for you,” Lombard said. “It looks like a raw deal for bondholders. I just don’t think they have the negotiating leverage to get anything better than what’s currently on the table.”
Bonds Rise
GM’s $3 billion of 8.375 percent bonds due in 2033 rose 2 cents to 10.75 cents on the dollar as of 12:03 p.m. in New York, according to Trace, the bond-price reporting systems of the Financial Industry Regulatory Authority. The debt yields about 77 percent.
Bondholders will be given 225 shares of GM common stock for each $1,000 in principal amount tendered and will also receive accrued interest in cash.
The offer is “extremely unattractive,” said
Mirko Mikelic, an investment manager at Fifth Third Asset Management in Grand Rapids, Michigan, which manages $14 billion in fixed income and doesn’t own GM bonds. “I’d be surprised if many take this offer. I don’t think bondholders are interested in a 10 percent equity stake. They want control.”
Loans Exchange
The proposed debt exchange is also conditional on the U.S. Treasury agreeing to exchange 50 percent of its loans at June 1, estimated to be $10 billion, for stock. The VEBA and the U.S. Treasury would own about 89 percent of the common stock in the reorganized GM after their debt exchanges, the statement said. The remaining 1 percent of stock would be held by GM’s existing common
shareholders.
“I’m not a big fan of the eventual ownership mix of the company,” said
Pete Hastings, a fixed-income analyst at Morgan Keegan & Co. in Memphis, Tennessee. “That seems to be an unfair shake to bondholders.”
The Obama administration ousted Chief Executive Officer Rick Wagoner last month, saying that GM’s plan to return to profit wasn’t aggressive enough, and ordered new CEO Fritz Henderson to cut the automaker’s debt by more than initially demanded. GM will be forced to go into a government-supported bankruptcy without deeper cost cuts from its creditors by June 1, the administration said.
Before Wagoner was removed, GM had proposed that bondholders swap more than three-quarters of their stake for equity, according to a person familiar with the talks. That offer would have given bondholders 90 percent of the equity of the reorganized automaker and a combination of cash and new unsecured notes, the person said at the time.
To contact the reporter on this story:
Caroline Salas in New York at
[email protected]
Last Updated: April 27, 2009 13:02 EDT
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