General Motors Co. (GM:US), after 14 profitable quarters, plans to buy almost half of the United Auto Workers retiree health care trust’s preferred shares as it continues to unwind financial ties from its 2009 bankruptcy.
The agreement is contingent upon GM closing an offering of senior unsecured notes that it’s starting today, the Detroit-based automaker said in a statement. GM will purchase 120 million preferred shares held by the trust for about $3.2 billion, or $27 each.
The deal, along with U.S. and Canadian governments’ efforts to reduce their ownership of the automaker, marks the latest move to pay back stakeholders in the 2009 restructuring. Moody’s Investors Service today upgraded GM to Baa3 from Ba1, the first time the automaker has had an investment-grade rating since its predecessor lost the designation in 2005.
“GM has been on a steadily improving operational and financial trajectory since it emerged from bankruptcy,” Bruce Clark, senior vice president at Moody’s, said in a statement. “We think that the disciplines the company has embraced, combined with the strength of its U.S. product portfolio and a healthy domestic market, will enable it to stay on that path.”
GM slipped less than 0.1 percent to $36.82 at 10:25 a.m. in New York. The shares surged 28 percent this year through Sept. 20, outpacing the 20 percent increase for the Standard & Poor’s 500 Index.
The company has been paying a 9 percent annual interest rate on the preferred shares held by the union trust and the new debt would presumable be at a cheaper interest rate. GM didn’t specify how much new debt it was seeking in the market. It plans to offer five, 10 and 30-year notes.
GM’s $750 million of 4.25 percent notes due May 2023, its longest maturity bonds outstanding, traded at 95.25 cents on the dollar to yield 4.87 percent in August, according to Trace, the bond-price reporting system of the Financial Industry Regulatory Authority. Those securities are ranked Ba3 at Moody’s and BB- by Standard & Poor’s.
Replacing the trust’s preferred shares with new bonds is essentially refinancing GM’s debt at less cost, Joseph Phillippi, principal of consulting firm AutoTrends Inc. in Andover, New Jersey, said in a telephone interview.
“I’m sure they can save 200 or 300 basis points,” he said. One hundred basis points equals 1 percentage point.
The new offering would mark GM’s first unsecured offering since emerging from bankruptcy, the automaker said in an e-mail.
The UAW medical trust currently holds 260 million shares. GM said it expects to record costs of about $800 million in the third quarter because of the transaction. GM has the ability to call the remaining preferred shares at the end of next year. The trust acquired the shares as part of the 2009 bailout.
The U.S. Treasury Department has reduced its stake in the automaker to 7.3 percent as part of a program to sell all of its shares as soon as this year. The Treasury’s stake is down from 32 percent in December when the government announced it was selling $5.5 billion of its stock back to GM and planning to sell the rest on the market within 15 months.
The U.S. said this month in a report it had recovered $35.4 billion of $51 billion invested in GM. With the remaining stake worth about $3.8 billion, the U.S. would probably lose about $11.8 billion.
Canada is also looking to exit its ownership in GM. The Canadian and Ontario governments earlier this month agreed to sell 30 million GM shares worth about $1.1 billion to Bank of America Corp. and Royal Bank of Canada in a block trade, reducing their stake by 21 percent to 110 million shares.
The governments are exiting GM as investor confidence has risen while the company introduces 18 new or redesigned vehicles in the U.S., transforming its lineup into one of the freshest in the industry from the one of the oldest. The restructured company held its initial public offering in 2010 at $33 a share.
GM, armed with some of its best vehicles in a generation, has benefited as U.S. industry sales of new cars and light trucks totaled 1.5 million in August, the most in one month since May 2007. The seasonally adjusted annualized selling pace exceeded 16 million for the first time since October 2007, signaling robust demand.
Light-vehicle sales in the U.S., where GM is the market leader, will probably rise to 16.1 million next year, the average estimate of 13 analysts surveyed by Bloomberg.
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