GM's Deal with Bondholders: A Speedier Bankruptcy?

By sweetening its terms to include stock warrants, the automaker seems to have ensured key support for its reorganization plan

By David Welch

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.

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