GM Makes Sweet Move With Bondholders

May 28, 2009

Just as Chrysler is moving through its bankruptcy, General Motors is working to make more friends at it heads toward a similar fate.

The Detroit News reports that GM has sweetened its offer to bondholders in an effort to bring them on board to support the company's restructuring. Bondholders, owed $27.2 billion by GM, have been offered a 25-percent stake in the "new" GM, up from a paltry 10-percent offer GM first tendered.

The U.S. Treasury plans to buy the "good" assets of GM under section 363(b) of the U.S. Bankruptcy Code if GM files for bankruptcy on Monday, as expected -- offering GM $30.1 billion in debtor in possession financing and exit financing. That would allow the "New GM" to quickly emerge, leaving behind the old company's assets -- a method similar to Chrysler LLC's bankruptcy.

The U.S. government will initially own 72.5 percent of GM's common stock, while a UAW trust fund will hold 17.5 percent and 10 percent will be held by the bondholders. They will receive warrants equal to 15 percent of GM, while the UAW trust fund will receive 2.5 percent.

The ad hoc bondholders committee praised the deal, saying it "believes that when contrasted with the alternative -- uncertain and costly bankruptcy court litigation -- that it represents the best alternative for bondholders in the current difficult and dire situation."

To a Wall Street outsider, this looks to be an amazingly complex shell game. My hope is that it all works better than derivatives  trading and the bundling for resale of mortgages.

[Detroit News]

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