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General Motors' New Landscape

GM's Deal with Bondholders: A Speedier Bankruptcy?

General Motors (GM) is probably still headed to bankruptcy court, but a last-minute agreement with bondholders on terms for a debt-for-equity swap could help pave the way for a fast reorganization of the company.

GM said early on Thursday, May 28, that an ad hoc committee representing owners of about 20% of its $27.2 billion in bond debt endorsed a plan that would give them 10% equity and stock warrants to purchase 15% in a new GM that would be created in bankruptcy court should GM file for protection in the coming days. With the support of the bondholders committee, plus that from other bondholders who accepted the original proposal, GM would go into court with at least 35% of debt holders agreeing up front. If the company can get 51% of its bondholders, and enough of them who collectively hold two-third of the debt, to agree to the new terms set forth Thursday, it will be easier for the court to impose the terms on unwilling creditors.

"If they get enough buy-in, the judge can impose the terms," says Don Workman, a bankruptcy lawyer at Baker Hostetler in Washington. "You'll also have the government saying that we have to do this. The judge may go along and not give the dissenters much say."

Bondholders have until 5 p.m. on Saturday, May 30, to submit letters saying they support the debt-for-equity proposal and won't oppose the sale of GM's assets into the new company. GM would then file for bankruptcy protection on Monday, June 1.

The new plan also has the U.S. government making a big bet that GM can come back strong. The government is willing to convert most of its debt, upwards of $50 billion, into equity. The Treasury Dept. will leave only $8 billion in debt on the balance sheet to be repaid. The government will try to recoup taxpayers' money once GM emerges from its restructuring and again has a tradable stock. "We're converting most of our debt to equity," said one senior Administration official. "This company will emerge with a very different balance sheet. We're excited about the prospects of the company."

The ad hoc bondholders committee was swayed by the added option that they can buy 15% more of the stock once the company's market value reaches $15 billion. The Administration official said that the ad hoc committee was already working to persuade other bondholders to join them in supporting the plan put forth by GM and treasury.

If enough of them agree, that would remove a major hurdle to a fast bankruptcy proceeding. GM already has an agreement with the United Auto Workers on new labor terms. The company also got the union this week to agree to take 17.5% equity in the new GM, plus $2.5 billion in cash and $6.5 billion in preferred stock that pays a $585 million annual dividend.

A Plan for More Manageable Debt

With these deals in hand, GM's bankruptcy could move as swiftly as Chrysler's reorganization has. Chrysler went into court with a union deal inked and ratified and with the majority of its secured creditors wiling to accept $2 billion in new debt in lieu of $7 billion in old debt. U.S. Judge Arthur Gonzalez was holding more hearings Thursday on Chrysler's plan for a sale to Fiat (FIA.MI); approval could move the company out of bankruptcy within weeks.

The Obama Administration acknowledges that a GM bankruptcy will be more complex than Chrysler's, but it still thinks that it can be done in 60 to 90 days, said one Administration official. Before Chrysler filed, many legal experts thought a bankruptcy was too complex to be done quickly.

GM hasn't filed for bankruptcy yet. Company spokesman Steven Harris said the company's board is reviewing its options since the bondholders turned down the initial offer of 10% equity in the new company in exchange for their debt.

But a filing appears more certain now. If done as planned, the reorganization could create a competitive new GM with lower costs and limited debt. GM has already taken out 21,000 hourly workers and enough white-collar staffers to reduce its fixed costs to levels that should allow it to compete with Japanese and other foreign rivals. Once all of the restructuring is finished, GM can make money in a car market selling 10 million vehicles a year and at an 18.5% market share (down from its current 19.1% share), CEO Frederick "Fritz" Henderson said in an interview this week.

Owing the Treasury

Debt will also be at manageable levels. The previous restructuring plan would have left GM with more than $40 billion in debt. But under the new terms—assuming bondholders take the deal—GM would emerge from the reorganization with just $17 billion in total debt. For a company of GM's size, that's far more workable.

The company would only owe the U.S. Treasury Dept. $8 billion upon exiting bankruptcy. Instead of paying the feds back the $19 billion borrowed so far, the government would get 72% ownership in the new company. GM would owe $2.5 billion to the UAW's health-care trust—also known as a Voluntary Employee Benefits Assn. (VEBA)—and $6.5 billion to secured creditors.

By taking so much equity instead of debt, the Obama Administration is making a big bet that it will be able to recoup taxpayer dollars by taking stock instead of making loans and getting paid off later. In fact, one Administration official said the initial $13.4 billion GM borrowed in the first quarter was probably not recoverable. But if the company makes a significant comeback, the Administration could make even that money back.

But GM would have to do quite well for that to happen. Only $8 billion in debt to the Treasury Dept. will remain on the balance sheet. Including debtor-in-possession financing, which Treasury would provide to keep GM running during bankruptcy, the government estimates $50 billion in debt will be turned into equity, according to GM documents files with the Securities & Exchange Commission.

Leap of Faith

So the government needs GM's stock-market value to soar from its current level of $757 million. Of course, the current figure has no bearing on GM's future worth; that market capitalization is based on GM's share price of about 1.20, which is depressed by anticipation of a bankruptcy filing in which current stockholders get wiped out. Plus, the new GM would have one-quarter the debt of the current company.

GM will probably become a private company for a short period of time, Administration officials said. Eventually new equity will be issued, but it could be 6 to 18 months before GM goes public again.

How will the government gets its money back? It's a gamble, but with only $17 billion in debt to start with (that doesn't count a possible $6 billion to be borrowed from the Energy Dept. for fuel-economy improvements) GM will have lower interest payments and can put its cash toward new models and marketing, as opposed to paying old bills.

At that point, it will be up to GM to prove that it can succeed without the burdens of high costs, debt, and retiree liabilities that have hamstrung the company for years. Treasury is betting that beneath decades of financial issues and labor problems is buried an American icon that truly knows how to make great cars.

Welch is BusinessWeek's Detroit bureau chief.

Welch is a reporter for Bloomberg News and Bloomberg Businessweek in Detroit.

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