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GM bondholders brace for ‘pennies on the dollar’ offer in revised plan

GM bondholders brace for ‘pennies on the dollar’ offer in revised plan

Automotive News | April 1, 2009 – 12:02 am EST


NEW YORK (Reuters) — General Motors bondholders on Tuesday braced for a reduced offer of "pennies on the dollar" for about $28 billion in outstanding GM debt and new terms for a swap under a revised survival plan.

Bondholders, a key constituency in any restructuring or potential pre-arranged bankruptcy plan, met on Monday to discuss GM’s latest efforts to overhaul its operations and reduce its debt burden, according to two sources who participated on the conference call.

Investors fear an offer of "pennies on the dollar," one source said, noting no new offer has been made and the key issue is recovery values in a debt swap, which bondholders view as an effective default. They had expected to recover 30 cents to 33 cents on the dollar in the event of a default or bankruptcy by the automaker.

Those expectations are now plummeting. The new offer may now be as low as 20 cents on the dollar, or even lower, some analysts said.

The Obama administration forced the resignation of CEO Rick Wagoner over the weekend and gave GM 60 days to reach deeper concessions with bondholders and the UAW. The administration said it would finance a court-supervised bankruptcy if the process failed to deliver big enough savings.

GM last week had offered bondholders 8 cents on the dollar in cash, 16 cents on the dollar in new, unsecured debt; and a 90 percent stake in the automaker, one person with knowledge of the term sheet told Reuters.

GM’s Henderson: ‘Go deeper’

GM’s new CEO, Fritz Henderson, on Tuesday said that the automaker will have to cut more than the roughly $28 billion in unsecured claims in its talks with bondholders and the UAW, implying a revamped offer to bondholders.

"The expectation is that we need to go deeper," Henderson said at GM’s Detroit headquarters. "We need to go deeper and we need to go faster."

Bondholders are preparing for reduced terms, according to the source, who asked not to be identified by name because of the confidential nature of the meeting. Debt holders also interpreted President Barack Obama’s reference to "a surgical bankruptcy" and promise that GM and Chrysler warranties would be honored as indications of an increased likelihood of a prepackaged restructuring.

Bondholders have not been offered a new term sheet or new conditions by either GM or the Obama administration, said a second source on a 10-member GM bondholder committee.

The second bondholder source said GM is the main actor in their negotiations. Bondholders have had little contact with the U.S. government except for one presentation earlier this month before the auto task force headed by former investment banker Steven Rattner.

Bondholders said in a statement on Monday they were "very disappointed" that the government and company have had no real dialogue with bondholders regarding the company’s restructuring.

GM’s benchmark 8.375 percent notes due in 2033, the most active GM bond on Tuesday, fell almost 3 cents on the dollar to about 13 cents, yielding 63 percent, compared with about 16 cents on Monday, when yields traded at about 52 percent, according to MarketAxess data.

Pre-arranged benefit

Kip Penniman, an analyst at credit research firm KDP Investment Advisors, said a quick, pre-arranged bankruptcy could still result in recoveries of close to 30 cents, versus zero for a traditional drawn-out bankruptcy.

GM has $1 billion in convertible debt coming due on June 1, which is close to the 60-day deadline set by the Obama administration for GM to resubmit its overall restructuring plan.

The 10-member bondholder committee represents all investor classes, including the largest holders such as Loomis Sayles and Fidelity Investments, both based in Boston, and Franklin Templeton Investments in San Mateo, California.

All those managers declined to respond to phone and e-mail messages, or have declined past requests to comment about the private talks.


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