GM’s finance chief says creditor suit may harm company

GM’s finance chief says creditor suit may harm company
Tiffany Kary
Automotive News | September 27, 2012 – 4:34 pm EST
UPDATED: 9/27/12 9:10 pm ET – correction

(Editor’s note: Correction deletes references in first paragraph and sixth paragraph to Morgan Stanley signing lock-up agreement before GM’s bankruptcy filing.)

NEW YORK (Bloomberg) — General Motors CFO Daniel Ammann, who advised the automaker on the eve of its 2009 bankruptcy while working as a Morgan Stanley banker, said a lawsuit over some Canadian notes may harm the company by as much as $918 million, or 50 cents a share.

Ammann, Morgan Stanley’s former head of industrials investment banking, testified today in a trial over how the bankruptcy treats general creditors and hedge funds that negotiated a $3 billion claim for holders of the notes.

GM “has over $30 billion in available liquidity,” more than enough to cover the possible impact of the lawsuit, Ammann said in U.S. Bankruptcy Court in Manhattan. The damage estimate, disclosed in the company’s August quarterly report, was considered a potential upper end of a range, he said.

Ammann said that in the 24 hours leading up to GM’s filing at 7:57 a.m. on June 1, 2009, he helped to negotiate a restructuring that kept GM Canada out of bankruptcy. He won a deadline extension from the Canadian government and secured the participation of Elliott Management Corp., with the goal of having the U.S. parent remain a viable automaker, he said today.

Lock-up agreement

The last piece of the restructuring — a so-called lock-up agreement — is the subject of a lawsuit brought by creditors against hedge funds including Elliott and Fortress Investment Group LLC. A trial began in August and continued today.

The lock-up agreement was negotiated with Ammann advising GM. Morgan Stanley didn’t hold any of the notes issued by GM Nova Scotia Finance Co. at the time of the bankruptcy filing, David Roman, a GM spokesman, said in an e- mail. Morgan Stanley bought some of the notes later in 2009 and signed the lock-up agreement, according to court testimony.

“I have no recollection or knowledge, now or at the time, that Morgan Stanley signed the lock-up agreement,” Ammann testified today. He said that he was “vaguely aware” that the bank’s fixed-income division did trading research on the notes later in 2009.

Mary Claire Delaney, a spokeswoman for Morgan Stanley, declined to comment on Ammann’s testimony.

General unsecured creditors allege in the lawsuit that Fortress, Elliott and other hedge funds steered events leading up to GM’s Chapter 11 filing to improperly benefit themselves and other holders of notes.

Face value

Through the lock-up agreement, the noteholders secured a $3 billion claim against Old GM’s estate, far more than the $1 billion face value of the notes, according to the complaint. The hedge funds say they didn’t do anything improper, and that if general creditors undo the agreement they struck in the hours before the bankruptcy, it will scuttle the entire deal that separated liabilities from GM’s profitable business, hurting the reorganized automaker.

General Motors at one point considered $285 million a fair price to keep its Canadian unit out of bankruptcy, Ammann testified. At another time, GM considered $234 million as the point where noteholder demands would be too much, and it would make more sense for GM Canada to file for protection from creditors, according to spreadsheets presented in court.

“This is a narrow component of a bigger judgment,” Ammann said, adding that no one at the time could put a number on the risks that a Canadian bankruptcy would introduce to the planned restructuring of the U.S. parent.

Through the lawsuit, creditors seek to reduce or reverse some of the hedge funds’ claims, partly based on allegations that the lock-up agreement wasn’t completed until after the 7:57 a.m. bankruptcy filing.

Judge’s review

The creditors say that means the accord should have been reviewed by U.S. Bankruptcy Judge Robert Gerber before he approved the separation of Old GM from New GM on June 5, 2009. Gerber, who issued a wind-down order sealing the separation in 2011, is overseeing the current lawsuit.

While all creditors eventually reached agreements to be repaid in stock and warrants in GM’s bankruptcy, the lock-up agreement gave the hedge funds a better deal at the expense of other parties, the general creditors allege. They seek to have a $367 million consent fee paid as part of the agreement revoked or considered a payment in principle on the notes, and to have the noteholders’ $2.67 billion claim cut or subordinated to other claims.

‘Pure fabrication’

The hedge funds say the tale told in the lawsuit — that a band of investors exerted leverage over the Canadian and U.S. governments and extracted a recovery out of proportion to their actual claim — is “pure fabrication.”

Matthew Stover, an analyst at Guggenheim Securities LLC who covers New GM, said the lawsuit has the potential to damage the company.

“If the creditors were to win, this would be a massive issue,” Stover said in a phone interview before today’s hearing. “It makes GM culpable for these liabilities — cash that shareholders think is on the balance sheet would belong to someone else.”

The lock-up agreement was fully negotiated and signed about 20 minutes before the bankruptcy was filed, and GM was represented by the law firm Weil Gotshal & Manges LLP in the transaction. “Certain non-material scrivener errors” that may have been agreed to after the agreement was negotiated shouldn’t count, the hedge funds said in court papers.

Ammann, who was advising GM as a managing director with Morgan Stanley, said in an e-mail to GM Vice President Walter Borst written at 6:49 a.m. that, “We are done,” according to exhibits filed in court records.

‘Clear preference’

“Excellent. And not a moment too soon,” Borst replied at 6:50 a.m., according to the exhibit.

GM Canada would have had to enter bankruptcy along with the U.S. parent had the transaction not been complete before the parent’s filing, Ammann said in a deposition.

“There was a clear preference as a business matter not to file GM Canada,” Ammann said in the deposition. “At the same time, there was a requirement from the Canadian government and the U.S. Treasury to file GM Canada if we had not resolved all of the outstanding issues relating to the Nova Scotia bondholders” as well as two other concerns: car dealers and the Canadian Auto Workers union.

GM has said in court papers that the lawsuit’s claims “threaten to disturb” the sale that saved the company. The agreement resolved a dispute over intercompany loans and allowed the U.S. and Canadian governments to buy GM Canada without requiring a separate bankruptcy, GM said.

‘Chaotic situation’

Voiding the lock-up agreement “could create a chaotic situation for GM Canada, spawn new litigation in other forums, and potentially provide a windfall to the noteholders,” lawyers for GM wrote in court papers.

The 8.375 percent notes due in 2015 recently traded at 43.87 cents on the dollar and the 8.875 percent notes due in 2023 recently traded at 43.75 cents on the dollar, according to Trace, the bond price reporting system of the Financial Regulatory Authority.

Motors Liquidation Co.’s bankruptcy plan repays general unsecured creditors through a trust with stock and two series of warrants, according to court papers. The GUC Trust is bringing the lawsuit on behalf of general unsecured creditors.

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