GM bondholders reject offer
Source says few GM bondholders were interested in a proposal to swap debt for stock - virtually guaranteeing a bankruptcy filing in the next few days.
NEW YORK (CNNMoney.com) -- General Motors has fallen far short of the bondholder support it needed for its proposed debt-for-stock offer, according to a source familiar with the matter, virtually guaranteeing that the nation's largest automaker will be forced to file for bankruptcy court protection within the week.
The bondholders own $27 billion in corporate notes. GM (GM, Fortune 500) needed owners of 90% of those bonds to accept stock in return for the debt in order to reduce its interest expenses to a more manageable level.
GM made the offer to bondholders on April 27. The company owes the bondholders $1 billion in interest payments on June 1 - money it says it does not have.
The company also faces a June 1 deadline to win concessions from its union, creditors and other parties or be forced into bankruptcy by the U.S. Treasury Department, which is funding GM's operations through direct federal help.
Only a small percentage of bondholders have taken up the company on the offer, according to the source. The bond offer deadline expired Tuesday night, and an official announcement is due early Wednesday.
A spokesman for GM had no comment about the apparent rejection of the offer. The ad hoc committee of major bondholders also had no comment.
But another source with knowledge of GM's restructuring discussions said the Treasury Department is still willing to hold negotiations with bondholders up until the June 1 deadline. The source said talks were likely to continue right up to the deadline and that the Treasury still hoped to reach an agreement that would satisfy those creditors.
"We've said consistently that we were happy to talk to any stakeholder any time about anything," the source said. "Recently there have been far more constructive and orderly conversations."
But the source added that Treasury believed the offer made to GM creditors, which would give them 225 shares of GM stock for every $1,000 they are owed, is fair and equitable, and that it is not likely to be substantially increased. The 225 shares would be worth $324 based on Tuesday's closing price, although the value of these shares could be significantly less after a reorganization.
However, if GM does go into bankruptcy, the source said that Treasury believes the bondholders would likely get even less than what was offered.
"In any kind of liquidation scenario, they would get nothing or something unbelievably small," said the source.
The stock being offered bondholders would be equal to only about 10% of the company. GM's stated plan is for the government and a union-controlled trust fund to own 89% of the company between them.
The United Auto Workers union disclosed to its local presidents Tuesday that it has agreed to accept 17.5% of GM's common stock to cover future retiree health care costs, as well as warrants for an additional 2.5% that give the trust fund the right to buy shares at a very low price.
Previously, many had expected the union to control nearly 40% of GM shares, rather than 20%. But the source familiar with the restructuring discussions said the lower stake for the UAW does not open the way for bondholders to get a larger stake in GM.
The source said the Canadian government will own a small percentage of GM, as it does of Chrysler LLC. The source added that a Treasury stake well above 50% is fair given that the government has provided GM with $19.4 billion in help so far and will likely give the company tens of billions of dollars more to fund its operations during bankruptcy.
Separately, the source said that Chrysler, which filed for bankruptcy last month, could emerge from Chapter 11 protection soon.
A bankruptcy judge will hold a hearing on Chrysler LLC's plans to join with Italian automaker Fiat on Wednesday morning. It is unclear if the judge will make an actual ruling on the proposal though. 
