Government to swap $40B for GM stock

Thursday, May 28, 2009

Government to swap $40B for GM stock

David Shepardson / Detroit News Washington Bureau

Washington — Taxpayers will exchange about $40 billion in loans to General Motors Corp. for company stock — and the government is likely to lose billions.

The swap could dwarf government losses at Chrysler LLC, where the treasury stands to forfeit up to $7 billion in loans it made to the Auburn Hills automaker before and during its bankruptcy stay.

An administration official said the $17.4 billion advanced to GM in the first three months of the year "unfortunately didn’t accomplish anything" and acknowledged the government was unlikely to recover much of that initial investment, which was authorized by the Bush administration.

"Allowing time to elapse without taking steps toward a fundamental restructuring simply is a value-destroying approach to life," the official told reporters, saying it "isn’t fair" to judge the Obama auto team by the loans made by the prior administration.

The U.S. Treasury plans to "advance substantial additional funds to GM and convert approximately $40 billion of this into common equity in the new GM, vastly improving the balance sheet of the company and substantially increasing its equity value," GM’s bondholders said.

GM has received $20.4 billion in U.S. government loans since December and is expected to get another $30.1 billion in debtor-in-possession financing and exit financing as it emerges from bankruptcy — though the exact figure remains in flux, a person familiar with the matter said Thursday.

The U.S. Treasury will retain up to $10.5 billion in loans and convert the rest to GM stock.

The Treasury will initially own 72.5 percent of GM, though it will eventually be diluted when stock warrants are exercised. They will offer another 2 percent to unsecured creditors if claims top $35 billion.

Unsecured creditors — primarily the bondholders — will get 10 percent of GM’s stock and have warrants to purchase another 15 percent. Current shareholders are likely to be wiped out — with an administration official saying they are to receive "little or nothing" for their shares.

The recapitalized GM will have $17 billion in debt, including $10.5 billion to the U.S. Treasury, and, likely, the Canadian government about $9 billion. As a result, GM will have slashed its debt by more than $50 billion, sharply reducing its interest payments.

The value of the government’s shares will depend on how much GM is worth when it emerges from bankruptcy — assuming, as most analysts do, that it will file for bankruptcy protection next week. But since GM won’t be immediately be publicly traded — likely for several years — the value of the government’s stake won’t be clear initially.

The official said he expects GM to again become a public company in six to 18 months.

At Chrysler, the U.S. and Canadian governments are loaning Chrysler another $6 billion in exit financing, which must be paid back before Fiat SpA can take a majority stake. Chrysler is making its way through bankruptcy.

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