GM must cut deal with bondholders

Tuesday, March 31, 2009

GM must cut deal with bondholders

Obama warns of high debt risk if carmaker files for bankruptcy

Robert Snell / The Detroit News

General Motors Corp. CEO Rick Wagoner may have lost his job, but the Obama administration Monday warned bondholders they risk losing much more, namely billions in debt payments unless they agree to steeper concessions in the next 60 days.

GM must negotiate concessions with bondholders that are even tougher than targets included in a $13.4 billion federal loan package approved by the Bush administration. The Obama administration’s message that a surgical bankruptcy filing might be the best solution for GM should force bondholders — and the United Auto Workers — to advance negotiations in coming weeks, analysts and industry experts said Monday.

"The reason I like the timeframe is by leaving the threat of bankruptcy on the table, it does force the bondholders and union to negotiate within that 60-day window," said restructuring expert Sheldon Stone of Birmingham-based Amherst Partners. "If GM has to file (bankruptcy), bondholders and the union could lose everything. If they cut a deal, they would get something."

In rejecting GM’s restructuring plan submitted Feb. 17, the Obama administration said GM needs "substantially greater balance sheet concessions" given the auto industry’s deterioration since late last year. The administration is giving GM working capital to operate during the next two months while developing a more aggressive restructuring plan.

The Obama administration said GM’s original restructuring plan would not result in a healthy company and that additional cuts would be needed. The GM plan submitted Feb. 17 involved eliminating 47,000 workers, shuttering 14 plants and selling, shrinking or killing its Saturn, Hummer, Pontiac and Saab brands.

During the next 60 days, the administration’s autos task force will work with GM officials to implement additional manufacturing, headcount, brand, nameplate and dealer network restructurings.

GM had been negotiating a complicated debt exchange with bondholders that would cut the automaker’s unsecured debt by two-thirds to $9.2 billion — a target bondholders said was unfair. On Monday, the Obama administration said greater balance sheet concessions would be needed.

Last week, CNBC reported that GM was offering bondholders for every $1 in bonds: 8 cents in cash, 16 cents in new unsecured debt and new stock in GM.

GM also has been trying to extract concessions from the UAW to restructure payments into a union-run health care trust.

"The road is tough, but the ultimate goal — a leaner, stronger, viable GM — is one we share," CEO Fritz Henderson said in a statement.

Advisers representing a committee of GM bondholders were encouraged by the administration’s assessment that the automaker’s restructuring plan would not result in a viable company. A more aggressive restructuring could boost the value of GM equity, bondholder advisers said in a statement.

"Make no mistake: Bondholders have been and remain willing to reduce GM’s future debt burden by exchanging a substantial part of their debt for equity, but that exchange must occur in support of a business plan that has a chance to succeed," the advisers said.

The bankruptcy threat issued Monday gained traction among some analysts. Standard & Poor’s Ratings Services said the risk of GM or Chrysler filing bankruptcy remains high for the rest of the year and into 2010.

"This is because of highly uncertain consumer demand and other serious risks, including persistently weak credit markets and potential auto supplier failures," S&P wrote in a research note. The move also did not help the Detroit automaker address its primary short-term challenges of excessive UAW and financial liabilities, said JPMorgan analyst Himanshu Patel.

Still, other analysts say it sent a strong signal. "It sends a message to stakeholders — bondholders, creditors, the union, suppliers — that they’ve got to see more movement faster, so that raises the pace of movement a little bit," said David Cole, chairman of the Center for Automotive Research in Ann Arbor.

The company also faces a 60-day deadline to make further changes to the viability plan it submitted in Canada. GM will get a portion of its $2.4 Billion (C$3 billion) funding in early April, said Federal Finance Minister Jim Flaherty, but more cuts are needed before the remaining money is granted. GM needs to make further labor and legacy cost cuts, despite the company and the Canadian Auto Workers having already ratified concessions.

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