Bloomberg Anywhere Remote Login Bloomberg Terminal Demo Request


Connecting decision makers to a dynamic network of information, people and ideas, Bloomberg quickly and accurately delivers business and financial information, news and insight around the world.


Financial Products

Enterprise Products


Customer Support

  • Americas

    +1 212 318 2000

  • Europe, Middle East, & Africa

    +44 20 7330 7500

  • Asia Pacific

    +65 6212 1000


Industry Products

Media Services

Follow Us

Bloomberg Customers

GM bondholders refuse to budge, making bankruptcy likely

Posted by: David Welch on May 27, 2009

General Motors is on a collision course for bankruptcy. The company said this morning that it didn’t get 90% of its bondholders, who collectively hold $27.2 billion in GM debt to take stock for their bonds. Since the Treasury Department has required GM to get 90% of that debt converted to stock to merit more tax dollars and avoid bankruptcy, a court filing seems inevitable. The only thing that would stop it is if GM sweetens an offer to those creditors and gets 90% of them to take the deal in the next two days. That’s very unlikely.

GM (GM) may have some leeway to do it. News broke yesterday that the United Auto Workers healthcare trust will take a smaller-than-expected stake in General Motors. The trust, called a Voluntary Employee Benefits Association, or VEBA, will get 17.5% of stock in a new GM plus warrants that would be worth another 2.5%. The union will use the assets in that trust to pay out benefits the way a pension fund does. Since GM’s original plan would have given the UAW’s trust 39% of the company, 50% to the government and 10% to bondholders, GM now has more equity to offer bondholders if the company wants to avoid bankruptcy.

But there are several reasons why GM may not even want to do that. First, the company has borrowed $19.4 billion from Treasury and will no doubt borrow more until car sales rebound. Add up just current borrowings and GM would emerge from bankruptcy or an out-of-court restructuring with easily $40 billion in debt. That’s better than the $63 billion GM had when the big restructuring started last year, but still way too much to really be competitive. The only way to reduce the debt held by the new GM would be forgiveness by the government. The Obama Administration is keen to do that, but to protect taxpayers Treasury would likely take more equity, perhaps 70%. That way if the new GM succeeds they have more stock to sell and recoup the money already loaned out.

It’s obviously a big gamble by Treasury. But as we have seen in the case of GM and Chrysler lenders, holding debt in troubled carmakers isn’t exactly a safe bet, either. So the government may as well reduce GM’s debt and give the company a fighting chance at survival.

The other big issue is GM’s plan to sell or dump Hummer, Pontiac, Saab and Saturn. Pontiac is going away. The other three are for sale. At a minimum, GM needs to break franchise agreements with Pontiac dealers. If GM can’t find a buyer for any of the other three, GM would need to buy out those dealers or face costly lawsuits. But as we have seen in Chrysler’s bankruptcy, it’s far easier to break franchise agreements in bankruptcy court. That’s another benefit of filing for Chapter 11 protection. Once there, GM puts the four bad brands and some factories in the old GM and the new one emerges with Chevrolet, Cadillac, Buick and GMC. About 1,600 dealers go away and so does a big chunk of debt.

Given those benefits, it’s hard to see why GM would want to avoid bankruptcy at this point. Giving more equity to bondholders means less for the government, which might translate to more debt to the feds on the balance sheet later on. Plus, you’d have the very thorny issue of getting rid of dealers. In short, bankruptcy gives GM a chance at a fresh start that they would have a much tougher time achieving out of court.

TrackBack URL for this entry:

Reader Comments

norman ravitch

May 27, 2009 12:30 PM

GM is essentially being nationalized. But what's to be good for GM may not be good for the country. It's hard to believe that O'Bama & Co. has gone this route. We can only hope it is temporary.

S Adams

May 27, 2009 12:36 PM

And it all could have been avoided...even as recently as three years ago....if GM managementhad been honest with themselves...and their stockholders & stakeholders.

Pity.If arrogance isn't one of the seven capital should be. A little humility and common sense...boys n' girls.

Will they ever learn? I guess we'll see won't we we'll see...won't we?


May 27, 2009 01:06 PM

GM and UAW can rest easy knowing we the tax payer will come back again and again to the rescue. This is just the beginning. There will be more bailout before the economy can come back and support GM.


May 27, 2009 01:07 PM

God forbid that Bond holders in a company should exchange their bonds for stock rather than file a bankrupcty. The big leader Trump wouldn't and look at his media light. Why should they not hold out for bankruptcy it pays off, or a bailout with unemployment and free schooling?

More power to them I say.
We've become America Home of Wave, Land of the Freeloaders. My father would be so proud and my mother of course wouldn't spin in her grave.

R Nelson

May 27, 2009 01:14 PM

Clearly the bondholders see the law on their side.


May 27, 2009 01:22 PM

Great..after twenty billion taxpayer dollars given to GM. Thanks Obama administration!!!

Jeff B

May 27, 2009 01:53 PM

I agree, David. Bankruptcy makes the most sense for GM now. However, I am still worried that our Govt will once again open the till for GM and let them have more of our tax dollars to fund the restructuring -- not because GM deserves it, but because of the risk to lose even more UAW jobs. The DNC won't let that happen because the flow of campaign $$ to the DNC would dry up.
Will every large US Corp now expect Govt money to help them through bankruptcy? That would be a very bad trend.

GM Daughter

May 27, 2009 02:22 PM

I think the vultures will force GM and Chrysler into Chapter Seven on purpose to get at the cash. If this happens, watch for riots in the streets outside the bondholders' offices.

Umbersto Zanabria

May 27, 2009 02:32 PM

What GM and Chrysler should do is to move out of the states where the "Right to Work" laws have not been passing or allowed to pass due to the obnoxious unions’ pressure and money.
We are now going to pay more and more taxes to sustain the unreal union costs.
Has anyone made public how much money the Unions Chiefs and their tremendous mafia entourage make? The leftist Liberal Press, of course, keeps quite about it.
What GM should do is to move all their operations and factories to states that have passed the “Right to Work Laws” where union membership is not a condition for employment.


May 27, 2009 02:41 PM

This question needs to be raised again - who is going to buy a GM or Chrysler car not matter how they emerge from bankruptcy? I know I will never buy either brand no matter what comes about. Yes, the companies messed up but the government has turned what was a significant mess into a massive disaster by its actions - an inept Congress looking to apportion blame everyone but itself, a president continuing the use of fear tactics to get legislation passed, a president bad mouthing the companies stating they have no products worthy of purchase, political parties expousing political FUD to further their agendas, and so forth. Yes, this mess is the companies, the government, the unions, and the President's fault - all played a role in the demise (yes, Obama is to blame because he was a Senator before President so he can't continue to state all problems prior to taking office were someone else's problems not his).

It is time to move on and let these companies fail and fail through the legal process. The brands are dead and cannot be revived. They need to be rebuilt from the ground up and that means it will be painful but that pain will be less severe if the government stays out of the mess as it is run primarily by lawyers not business or line workers and therefore really isn't qualified to take restructure these companies. Let the experts deal with this issue and stay out of it.

Oh, and no matter what happens, there will be many Americans who will never buy a GM or Chrysler product no matter what happens. Does not matter what the government does or how the companies rebuild. People will remember the problems and not trust what emerges from this disaster for many years to come. I know I will not buy their products as long as the government is calling the shots at the end of the day since once its claws are into any company it will never truly let go and allow innovation and market forces to shape the products built.


May 27, 2009 02:50 PM

I know, let's print up a bunch of money at the FED/Treasury, mail it out to Americans, and tell them they can only spend it on buying cars from GM. Problem solved. Gosh, this is easy, what should we the government take over next?


May 27, 2009 02:56 PM

OK, am I the only one who doesn't think what is happening to the bond holders isn't right? Obama gives GM $19.4B in loans and will forgive the debt for a 70% stake in the company...yet those of us who bought bonds and hold $27.2B of GM debt are expected to exchange it for only a 10% stake? How does this make sense? And we're getting vilified by this socialist administration and its puppet media for being greedy speculators?

US Gov't: $19.4B = 70%
Bond Holders: $27.2B = 10%

I guess this is the new math....


May 27, 2009 03:34 PM

GM, Chrysler and Ford are victims of their own success. They basked under the glory of 60's through 90's. The Auto workers also took advantage with ridiculous benefits for a blue collar workers. Their benefits rivaled that of white collars and better. Health care for retirees seems far too extravagant. No wonder the reality sunk in and the result was obvious. Unionization is like communism. Look what happened to Communist nations around the world. Sooner or later the down fall is certain.

28 years on Wall Street

May 27, 2009 03:48 PM

I disagree with every post here. First off new money always dilutes old money. Sorry bondholders but you could have sold them and nobody twisted your arm to buy them in the first place. You supposedly weighed the risk and return continuously and elected to keep them. The GM board and their bondholders have a history of making bad decisions just like your decision to hold the bonds.

Next, workers, thankfully, have a right to organize.Without the even playing field that organized labor provides, most of America's work force wouldn't have pensions, health care, a 40 hour work week, safe working conditions and even week ends. All those employee rights that are in the white collar office came because some guy from the mine workers or steelworkers got shot at and beat up by company thugs years ago.

A bankruptcy for GM would like all bankruptcies, get rid of the old and allow for a leaner meaner company.
The government facilitating that would make it even happen quicker.As to buying a GM car ,the government said they would backstop the guarantees.


May 27, 2009 03:49 PM

When you buy bonds, you're making a bet that the company would thrive in the long term. In this instance, you bet wrong.

The government is stepping in to minimize the number of people screwed, so look on the bright side... You could have less than 10%.


May 27, 2009 03:51 PM

I will never buy a car/truck/SUV or any motor vehicle from Government Motors. When the government is 100% out of it, and it is again wholly owned and operated by the private sector, only then will I even consider a purchase. In the meantime, I will be looking at Ford, Toyota, Honda, and other free market enterprises only. Never will I consider a government owned and operated entity for a motor vehicle, or any other purchase for that matter.

Government has no business owning businesses. Stay out of it!


May 27, 2009 04:01 PM

Fubar, 'Google' this- THE OBAMA DECEPTION, and watch it. Maybe it'll answer your questions.


May 27, 2009 04:05 PM

I have the utmost confidence that GM will survive as an auto manufacturer. Through the years (and decades) collective union and management decisions have led to the situation they are in today. Bankruptcy (and the administration) are forcing those necessary changes in a a series of quick and very painful actions. Changes that should have occurred over the decades.

Nissan Driver

May 27, 2009 04:09 PM

I like Japanese Cars and I think the Hyundai brand is coming up fast in their rearview. Yet the American car companies continue to make the same mistakes. With the exception of a few models they make repulsive vehicles. Chrysler in particular is despicable. Their build quality is worse than Chinese or Indian made cars. I am not joking, it's like the manufacturing is done by apes.

If Chrysler and GM want to sell cars they need to stop building revolting garbage. I can't believe how unreliable their cars are past three years. They have no resale value and are a bitch to maintain in running condition. I've got a '02 Maxima, and a '96 Maxima in my family with 80K+ and 185K+ on their odometers. Neither car has ever had a major mechanical problem. EVER! Nothing but normal wear and tear. There's also a '99 Chevy Astro that has cost probably ten thousand dollars to repair. Alternators, fuel pumps, rear diff, transmission, wiring problems, and of course generally shitty build quality. The government/union ownership will only make it worse.

But look at the bright side, Karl Marx was right. The workers will eventually take control over the means of production and bring about socialism. Which will eventually with ever expanding worker empowerment will turn into communism! All hail the new utopia.

Hugo van Randwyck

May 27, 2009 04:19 PM

Maybe GM could shift final assembly production to their dealer network, so minimising the need for finished goods stock at dealers? Nucor steel has, around 200 mini-mills in North America, maybe this smaller style is better, for final assembly. The Nano, from Tata, will be sold in kit form to dealers. This is an opportunity for GM. People will buy from GM, though less likely from GM/UAW. If the UAW cared about their members, they would see they are a bad 'brand', and give a postal vote on seting up a new, GM union, independent of the UAW.


May 27, 2009 04:31 PM

bond holders/stock holders>
Should have bailed 10yrs ago..sold off what ya had.
Did not see the writing on the wall in the 70's.
You must have fallen asleep..all the auto/oil makers suckered you in and you did not wakeup..too bad..
I'm ticked at government--again--spending MY tax money down the drain...AGAIN..


May 27, 2009 04:36 PM

GM deserves to go under! They had their chances over the years, they blew it royally. Blame management AND the greedy workers who drove them to the poor house. Now they ALL get to live there!


May 27, 2009 05:34 PM

When Obama says he does not want to run a car company, He is lying. They have been all through GM at this point. Say what you want about the product line up but the company has done major research over the years on transportation. They are drooling over that 100 mile carburetor lock in the basement. They are going to use GM as the standard to implement green policy. They are going to treat it like a government corporation and use it to change the market. In fact, it will have such an advantage; I worry about Ford making it. While the company has a tainted rep, most people feel pretty American when it comes to Chevrolet and Cadillac. There cars are pretty good and they were developed with limited funds because GM has been broke for years. Imagine the R&D they are going to spend on new car development now that they are debt free. Ever watch the auctions? It’s the GM cars from the 1960’s that bring in the big money. They had a lot less debt back then. People seem to forget the relevance and size of this company. The gloves are going to come off over at GM or whatever it will be. I am backing up the truck on stock when it merges from bankruptcy.


May 27, 2009 06:22 PM

The Auto Task Force has taught GM and Chrysler to Steal. They have a created by the Task Force chap 11 bankruptcy then do a 363 deal, and steal the private property of bondholders and new car dealers. The stolen property is then given to the UAW in a sweet contract. The UAW gets over 100 cents on the dollar for its 20 Billion VEBA and the bondholders are robbed and offered 2 cents in stock.
The UAW gets 4 Billion and 152 Million in CASH from a Note with a face value of 2.5 Billion, thats a 21% CASH return on its 20 Billion VEBA.
The UAW gets 6 Billion 500 Million in Pre Stock, thats 33% of the 20 Billion VEBA .
The UAW from Cash and PreStock has a 54% return on its VEBA. Thats a 54% return so far. add to that.

The UAW gets 585 Million also in CASH from the 9% coupon on the PreStock every year they have it. Every 10 yre this will throw off around 6 Billion dollars thats also around 33% of the VEBAs 20 Billion owed.
The UAW also gets 20% of GM common, 17.5% upfront with a 2.5% warrant. The UAW can sell the stock at any time.
Added up the UAW have a 100% plus return on the VEBA, their return will exceed the 20 Billion owed. Are we still in America? Since when is it legal to steal private property by the state?
UAW 100 cents plus :Bondholder maybe 2 cents.
The Auto Task Force has stolen the 2 billion that Gm payed out every year to the bondholders as interest and given it to the UAW.

Gimme a BREAK

May 27, 2009 07:40 PM

Sure, for 30 years or more, the American public has been shafted. Now, both political parties are shafting us again, and again, and again. Do ANY of you baboons involved in all this (Repubs and Dems + UAW/Mgmt) really believe, we, The ABUSED, will go out and buy a piece of crap from BANKRUPT Detroit? for Detroit? ARMAGEDDON! And damned well DESERVED!


May 27, 2009 07:47 PM

Agree with Mike's post (May 27, 2009 02:41 PM)

Was against the bailout from the start now I'm party to the bail out like it or not. Too much water & bad blood under the bridge to ever buy from GM or Chrysler. They had lots of time to see the oncoming train wreck, done too little too late. The pariah companies will be a dog with fleas for years to come.


May 27, 2009 07:56 PM

Good for the bondholders. Don't get screwed by the Gov't by taking pennies on the dollar. Sure the Obama Admin will create all kinds of bad press for you. But hey, join the majority and enjoy it.

This is socialism of the highest order. The admin knows exactly what they are doing. This is deliberate and very serious. I will never, ever, buy a Gov't Motors Vehicle; however, I will go out of my way for Ford instead. Over at Ford, they rejected the Gov't takeover attempt and remained free market. And they risked alot of political heat to do it. They deserve our support. And no, I have no connections or interests in Ford at all.

austin, tx

May 27, 2009 10:51 PM

gm sucks, nuff said. no youngins drive em...there out once the old hicks pass on...

what are the 7 capitalist sins?

bill shell

May 28, 2009 07:08 AM

to 28 years on wall street.
ow I understand why wall street is so screwed up. The unions have caused 90% of the problems where they are involved with companies. They act like they own the company. They organize on the backs of whoever buys the product. Are they that great.? Look at the UAW 20 years ago. A million members, roughly? Now they have less than 300000. They are greedy and only care about themselves. I hope the contracts are broken in bankrupcy and guy's like Gettelfinger are thrown to the dogs.
Goodby to the unions!!!


May 29, 2009 01:57 PM

Someone please explain the logic of this deal: while bond holders are owed $27 Bil., the government owed $19.5 Bil., and the UAW owed $ 25 Bil., the evil bond holders are only entitled to 10% of the reorganized company. This kind of treatment of investors will not encourage anyone to put money in bonds ever again. I know I will never again have confidence in the written contract.

The Mad Hedge Fund Trader, San Francisco, CA

May 29, 2009 11:19 PM

The imminent demise of General Motors (GM) will be a nail in the coffin for the commercial real estate market, which I believe will be the financial crisis of 2009. Some 2,000 dealers are being axed, dumping hundreds of millions of square feet on to a market that least wants it. These were the guys who sponsored the local baseball team and Girl Scout cookie sales, and their absence will rip the hearts out of hundreds of American communities. Much of this is prime space, near dense populations, with great frontage, adjacent retail space, completed site work, mitigated environmental work, and already zoned for commercial use. Some might get turned into mini malls, but I’m afraid more will end up as indoor climbing walls and paintball battlefields. Commercial real estate sales are off 73% this year, while vacancies have catapulted to 16.7%. Banks have seized 464 properties so far in 2009, including $7 billion worth in March alone, and thousands more are on the

Paul (Vw)

May 30, 2009 04:27 PM

>>> Given those benefits, it’s hard to see why GM would want to avoid bankruptcy at this point.

On the plus side, Chrysler/GM will provide us the opportunity to see if the apocalyptic predictions from late last year--about consumers shunning cars from automakers filing bankruptcy--were accurate.


June 1, 2009 10:34 AM

Let's be honest. We are all sad about workforce losing jobs as life is not easy these days, and I totally sympathise with this.

However, when the going is good, everyone over-reaps the rewards, perhaps these challenging times are now telling us to slow down, think ahead, not get greedy and be stringent about what we are owed versus what we should take in life...


June 3, 2009 06:47 AM

The fall of GM as an industrial giant of the 20th century will forever be written in college business management books about how NOT to run a company.Four years ago, the chief finanical officer for GM told Waggoner the company was bleeding cash and heading towards an abyss. He also ignorned the market conditions, upward oil price pressure, etc, etc, etc. GM was spending 1 million dollars a month on Lipidor for its production workers and the UAW still wanted a bigger piece of the pie. No cooperation, no teamwork, no new ideas, no business plan on how to get the company profitable, other than closing plants and laying off workers. With all the innovation that American has, it is unbelievable that they could not utilize talent correctly. On a Clear Day, you can now barley see GM.

certified debt management companies

June 15, 2009 08:26 AM

With the twister of economic despair upsetting many people these days, becoming debt free is now the major center on many people's mentality People are opening to appreciate if they want exist debt free they have to prepare, preparation, plus take achievement to get there. People facing bankruptcy will frequently check with a qualified bankruptcy attorney to help guide them throughout the procedure and make sure their container is resolved in an acceptable manner.

Post a comment



Want the straight scoop on the auto industry? Detroit bureau chief David Welch , Dexter Roberts and Ian Rowley bring daily scoop, keen observations and provocative perspective on the auto business from around the globe. Read their take on such weighty issues as Detroit’s attempt at a comeback, Toyota’s quest for dominance and the search for an efficient car.

BW Mall - Sponsored Links

Buy a link now!