REVscene Automotive Forum - GM Said to Plan June 1 Bankruptcy as Debt Plan Gains

May 28 (Bloomberg) -- General Motors Corp., the world’s largest automaker until its 77-year reign ended in 2008, plans to file for bankruptcy protection on June 1 and sell most of its assets to a new company, people familiar with the matter said.

GM’s path will be smoothed by an accord today giving some of its biggest bondholders an equity stake in the reorganized automaker. The U.S. Treasury is requiring that an unspecified percentage of debt holders accept the terms by 5 p.m. New York time on May 30, Detroit-based GM said in a regulatory filing.

“If bondholders agree to this up front, this would essentially be a prepackaged bankruptcy,” said Shelly Lombard, an analyst with New York-based bond-research firm Gimme Credit LLC. “GM could exit Chapter 11 faster.”

Battered by almost $88 billion in losses since 2004, GM fell short in a bid to cut debt by $44 billion under a U.S.-set June 1 deadline to restructure outside court. The 100-year-old automaker seeks to rebuild around assets such as the Cadillac and Chevrolet brands as it follows Chrysler LLC into bankruptcy.

The people familiar with GM’s plans didn’t specify where the automaker might make its Chapter 11 filing. They asked not to be identified because the details aren’t public.

Vice Chairman Bob Lutz, while not confirming GM’s intentions or a possible bankruptcy venue, said any court restructuring would be quick.

‘Pay It Back’

“We intend to get in and out very soon,” he said today at an Automotive Press Association luncheon in Detroit. “The U.S. government wants its money back, and our plan is to pay it back as quickly as possible. The U.S. government doesn’t want to own auto companies.”

The bankruptcy probably would last 60 to 90 days, said an Obama administration official who asked not to be identified because the talks are private. The Treasury will finance the trip through bankruptcy with about $50 billion, which includes $19.4 billion in current borrowing, GM said in a statement.

GM’s bankruptcy will be the third-biggest in U.S. history after Lehman Brothers Holdings Inc. and WorldCom Inc., based on GM’s reported global assets of $91 billion and total liabilities of $176.4 billion as of Dec. 31. Chrysler, which sought court protection on April 30, listed assets of $39 billion.

Going to court would end the suspense for GM, which said it expected to declare bankruptcy after failing to get enough support for a debt-for-equity exchange on $27.2 billion in unsecured bonds.

Sweetened Offer

Only 15 percent of bondholders approved the offer to trade their debt for a 10 percent stake in the new company, a person familiar with the matter said. GM sweetened the plan today to promise warrants good for buying 15 percent more of the new enterprise, which would have an improved balance sheet based on a U.S. plan to trade bailout loans for equity.

Another 20 percent of bondholders now support the swap, according to a statement from their ad hoc committee today.

Bondholders would lose some or all of the warrants and their 10 percent stake in the new GM entity unless the company wins sufficient support from those investors to satisfy the Treasury, GM said in the regulatory filing.

The government will make a “judgment call” on May 30 as to whether bondholder backing for the latest proposal is sufficient, the administration official said.

The accord with bondholders marks “another important step” in GM’s restructuring, another administration official said in Washington. President Barack Obama set the June 1 deadline after the government began propping up GM with emergency loans.

New Owners

The filing shows the U.S. Treasury owning 72.5 percent of equity in the new GM, a union health-care trust with 17.5 percent and 10 percent going to the old GM to hand to creditors in the bankruptcy process.

Creditors would have warrants to buy as much as 15 percent of the company through newly issued shares in two portions. The first 7.5 percent would become available when GM’s market value reaches $15 billion and the remainder at $30 billion, according to regulatory filings.

GM’s market capitalization last exceeded $30 billion in January 2004, according to Bloomberg data. The value at yesterday’s closing stock price was $702 million.

According to the filing, the debt at the new GM would consist of $8 billion in new Treasury loans, $2.5 billion owed to the United Auto Workers fund and $6.5 billion in dividend- paying preferred stock. The Treasury will get $2.5 billion in preferred shares that pay a 9 percent annual dividend, bringing the issuance to $9 billion in preferred stock.

Bonds, Shares

GM’s 8.375 percent bonds due in July 2033 rose 3.88 cents to 11 cents on the dollar as of 5:06 p.m. in New York, the highest closing price in seven weeks, according to Trace, the bond-pricing service of the Financial Industry Regulatory Authority. The yield was 96.8 percent.

The shares rose 15 cents, or 13 percent, to $1.30 at 4:09 p.m. in New York Stock Exchange composite trading. The stock has fallen 59 percent this year.

A portion of the debt financing for the new GM may be provided by the governments of Ontario and Canada, according to the filing. In that case, those governments would receive part of the preferred stock and common equity of the new company allocated for the Treasury.

GM wants to scrap the Pontiac line, sell its Hummer and Saturn units, and drop as many as 2,400 U.S. dealers by the end of 2010. Its Saab Automobile unit is in bankruptcy protection in Sweden, and the Opel division in Europe is up for sale.

Federal Recovery

The administration is optimistic about prospects for recovering taxpayer dollars being invested in GM’s restructuring, according to the official who discussed the timetable for the automaker’s stay in court.

The official didn’t know how much may be recovered and wasn’t certain about amounts invested during the George W. Bush administration. GM would be a private company for a time under the restructuring plan currently envisioned, the official said.

Chrysler may leave court protection as soon as next week under a plan to create a streamlined entity run by Italy’s Fiat SpA, based on the official’s prediction earlier this week that the automaker’s time in bankruptcy might be only about 30 days.

GM reached a tentative agreement with the UAW on May 21 to modify a 2007 labor contract and a day later arrived at a similar accord with the Canadian Auto Workers to keep alive operations in that country.

UAW members are voting this week on the contract changes and a plan to shrink GM’s obligation to a union-run trust fund for retirees’ medical expenses.

GM ceded the global auto sales crown last year to Toyota Motor Corp. and hasn’t posted an annual profit since 2004. GM’s U.S. sales have fell for 18 months in a row through April.
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