GM moves step closer to bankruptcy

Company announces that few bondholders were interested in a plan to swap debt for stock. New ownership stakes take shape: U.S. to get nearly 70%.

EMAIL  |   PRINT  |   SHARE  |   RSS
 
google my aol my msn my yahoo! netvibes
Paste this link into your favorite RSS desktop reader
See all CNNMoney.com RSS FEEDS (close)
By Chris Isidore, CNNMoney.com senior writer

301 Moved Permanently

301 Moved Permanently


nginx
Do you think the changes being made at Chrysler and General Motors will save the companies?
  • Yes, both of them
  • Only GM
  • Only Chrysler
  • Neither

NEW YORK (CNNMoney.com) -- General Motors said Wednesday that it has fallen far short of the bondholder support it needed for its proposed debt-for-stock offer, virtually guaranteeing that the nation's largest automaker will be forced to file for bankruptcy court protection within the next five days.

The bondholders were not satisfied with the prospect of owning only 10% of the company when the U.S. government would own nearly 70% and a union-controlled trust fund up to 20%.

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.

But GM's announcement said that bondholders who took the company's offer were "substantially less than the amount required."

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.

"The GM board of directors will be meeting to discuss GM's next steps in light of the expiration of the exchange offers," said the company's statement.

In another sign that a bankruptcy filing could come as soon as Friday, GM moved up the pay date for its U.S. employees this week.

Hourly employees represented by the United Auto Workers union were paid Wednesday, and salaried employees will be paid Thursday, said GM spokesman Chris Lee. Both normally would have been paid Friday.

"Obviously there's a lot of anxiety as we approach the June 1 deadline," said Lee. "We just moved the payroll up as a way to reassure our employees that payroll will continue regardless of what takes place next week."

GM had previously announced that it would make about $2 billion in payments due to suppliers on Thursday, rather than waiting for the normally scheduled payment on June 2. If the company files for bankruptcy, it would need court approval to make payments to employees and suppliers.

Lee said the early payroll payments should not be taken as an indication that the filing would come on Friday.

What next for bondholders?

The ad hoc committee of major bondholders had no immediate comment on the vote. The group, which includes major pension funds and mutual funds that own large blocks of the bonds, had proposed the bondholders as a group receive 58% of the stock in GM, rather than the 10% being offered.

The major bondholders have also said they want to continue negotiating with Treasury's auto industry task force overseeing the federal bailout of GM and Chrysler LLC.

A source with knowledge of GM's restructuring discussions said Treasury is willing to hold negotiations up until June 1.

"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.

It is estimated that about 20% of the $27 billion in debt, between $5 billion and $6 billion, is held by individual investors who bought the bonds for the steady revenue stream they provided. Most of the bonds pay better than 7% interest, and those that were purchased at a discount since GM debt was downgraded to junk bond status in 2005 pay an even better return.

GM stock does not pay any dividend and will not do so for the foreseeable future. Stock is also a riskier investment than bonds because stockholders are certain to be wiped out if there is a bankruptcy filing, while bondholders can hope that they will recover some of their investment in court.

But rating agency Standard & Poor's estimates that the bondholders, whose debt is not secured by specific company assets, will get between 0% and 10% of their investment back in bankruptcy court.

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 UAW 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. 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.

General Motors' U.S. operations are not the only ones experiencing trouble. The company is looking to sell a majority stake in its money-losing European business, which operates under the Opel and Vauxhall brands.

On Wednesday, GM spun off those brands - including plants, sales organizations and patents - into a new company. GM said the move will allow the German government to place those assets into a trusteeship and provide its own bailout to continue operations until a sale can be finalized. To top of page

Features
They're hiring!These Fortune 100 employers have at least 350 openings each. What are they looking for in a new hire? More
If the Fortune 500 were a country...It would be the world's second-biggest economy. See how big companies' sales stack up against GDP over the past decade. More
Sponsored By:
More Galleries
Want to buy -- and live in -- a piece of history? It's not that far out of reach. These historic homes are not only for sale, they are incredible bargains. More
5 ways retailers are tracking you If you think pesky salespeople are invading your personal space, check out these 5 technologies that are tracking your movements throughout a store. More
Moto X vs. Droid Turbo: Which Droid should you buy? Motorola has made the two best Android smartphones this year. Here's how they stack up. More
Worry about the hackers you don't know 
Crime syndicates and government organizations pose a much greater cyber threat than renegade hacker groups like Anonymous. Play
GE CEO: Bringing jobs back to the U.S. 
Jeff Immelt says the U.S. is a cost competitive market for advanced manufacturing and that GE is bringing jobs back from Mexico. Play
Hamster wheel and wedgie-powered transit 
Red Bull Creation challenges hackers and engineers to invent new modes of transportation. Play

Most stock quote data provided by BATS. Market indices are shown in real time, except for the DJIA, which is delayed by two minutes. All times are ET. Disclaimer.

Morningstar: © 2014 Morningstar, Inc. All Rights Reserved.

Factset: FactSet Research Systems Inc. 2014. All rights reserved.

Chicago Mercantile Association: Certain market data is the property of Chicago Mercantile Exchange Inc. and its licensors. All rights reserved.

Dow Jones: The Dow Jones branded indices are proprietary to and are calculated, distributed and marketed by DJI Opco, a subsidiary of S&P Dow Jones Indices LLC and have been licensed for use to S&P Opco, LLC and CNN. Standard & Poor's and S&P are registered trademarks of Standard & Poor’s Financial Services LLC and Dow Jones is a registered trademark of Dow Jones Trademark Holdings LLC. All content of the Dow Jones branded indices © S&P Dow Jones Indices LLC 2014 and/or its affiliates.