GM: Some Bondholders Want Bankruptcy
While many bondholders would be wiped out, others would be richly
rewarded through credit default swaps. Also, Pontiac may close
With the Treasury Dept. directing Chrysler to prepare to file for
bankruptcy, it might be expected that the bondholders who own $28
billion in General Motors (GM) debt might be scared into cutting a deal.
Don't be so sure.
The barriers to getting a deal done with GM bondholders, and negotiating
away enough of that debt to strike a deal and avoid a planned,
government-assisted bankruptcy, remain very big, with five weeks to go
before the deadline.
First, all of the constituents may be willing to take a piece of equity
in place of the cash they are owed. But even with a restructured GM that
carries less debt and has more value, there is only so much equity to go
around. It may be impossible to give everyone the equity stake that they
want, say two sources close to the talks. And second, some of the
bondholders own credit default swaps, which amount to an insurance
policy against the debt and pay them in full if GM defaults. Those
bondholders actually fare much better if GM goes into bankruptcy.
Bankruptcy May Be GM's Best Option
If enough bondholders refuse to budge, GM and the U.S. Treasury Dept.'s
auto task force will likely see bankruptcy as the best option to dispose
of the debt and solve other issues like cutting labor costs and getting
more than 1,500 car dealerships to go away. "When you look at the pros
and cons, there are a lot of benefits for GM bankruptcy," says Michael
Robinet, vice-president of CSM Worldwide, an auto industry research and
consulting firm in Northville, Mich.
It may be the only way to accomplish the government's goal of getting
rid of most of the $28 billion in bond debt. GM wants the bondholders to
take most, if not all, of their debt in stock. But how much stock is a
That's problematic. GM also owes the United Auto Workers $20 billion for
a retiree health-care trust that will pay medical benefits. Treasury and
GM want to give the union a big chunk of that in stock.
Government Could Take Equity
And there's one more player likely to own a big chunk of GM: the feds.
The government has loaned GM $15.4 billion, including $2 billion more
given to the automaker on Apr. 24. In or out of bankruptcy, GM's debt to
the government could easily reach $30 billion. And that doesn't count
the possible $8 billion from the Energy Dept. to GM for fuel economy
The auto task force doesn't want to replace $48 billion in bond and
union debt with government loans, so the government could take a big
piece of equity, too. The $9 billion owed to secured creditors, by the
way, wouldn't be touched, sources say.
That raises some very thorny questions at the bargaining table. First,
how much is GM worth once you scrub away much of the debt and union
obligations? That depends on your assumptions about the size of the car
market, what GM's share of it will be, and what kind of pricing the
company's models can command. All of that is very subjective and
complicates negotiations, say sources close to the talks.
The Credit Default Swap Hitch
There's another huge catch. Internally, GM has been trying to find out
how many of its bondholders hold the credit default swaps that will pay
them in full if the automaker goes bankrupt. But the company has not
reached a conclusion.
But it could be big enough to keep a deal from happening. Put it this
way: Treasury wants to get about 90% of the bondholders to take the
debt-for-equity exchange. So you only need about $2.8 billion worth of
debt in the hands of people who also own the swaps and a few others who
won't take the deal to hold things up.
There are some $2.7 billion worth of GM credit default swaps swimming
around in the market, says Tim Backshall of Credit Derivatives Research.
Swap owners are not required to own the debt as well, so some may own
swaps but not bonds. But if all of them hold GM debt and decide to get
repaid in full through insurance policies in bankruptcy, it won't take
too many more recalcitrant bondholders to get a deal done. "That's why
you'll probably have to have a bankruptcy," says Richard Christopher
Whelan, senior vice-president and managing director of Institutional
While GM is preparing an offer for its bondholders, the company is also
mulling the fate of its brands. GM has resisted suggestions to ditch its
GMC truck brand, and two GM executives say the company has won the
argument. News reports from Australia, where GM's Holden unit makes the
Pontiac G8 sports car, suggest that GM may ditch Pontiac instead of
keeping it around as a one- or two-car niche brand. Insiders say GM may
dump it since the company has no new Pontiac models in the works.
At the same time, GM has several interested bidders in the Saturn retail
network. One is a dealer group affiliated with private equity firm Black
Oak Partners. Another is Renault-Nissan (NSANY). The French-Japanese
auto alliance has been approached and gave it a look.
But any European carmaker may have trouble entering the U.S. even with
Saturn's network, says James N. Hall, principal of 2953 Analytics, a
Detroit-area auto consulting firm. European models are made with more
expensive content because their buyers pay more for smaller cars due to
expensive fuel. Plus, exchange rates hurt their profit potential, Hall says.
In any case, if GM enters bankruptcy, it could dispose of the unwanted
brands more easily, says CSM's Robinet. Dealers could still sue under
state franchise laws, but good luck getting any cash when the secured
creditors, parts makers, government, UAW, and bondholders are already in