Winning Over Bondholders: Key to GM's Survival
GM bondholders fear that even with a bailout, the carmaker may not avoid
bankruptcy. They want their money now
By David Welch
The clock is ticking for General Motors (GM). Next week the struggling
automaker has to submit its restructuring plan to the Obama
Administration to get the billions it needs to stay out of bankruptcy.
But it may be even tougher to win over GM's bondholders.
The bondholders may end up being GM's most intransigent obstacle. The
reason is that some among the diversified group of bondholders, which
include such large institutional investors as Franklin Resources (BEN)
and Fidelity Investments, are not convinced that they should take the
company's offer to reduce their holdings by 70% in exchange for stock in
the company. Others have their own demand that GM wrest more concessions
from the United Auto Workers before they cut a deal.
If enough of them refuse to be part of the debt restructuring, they
could throw a wrench in GM's plan to get the remaining $4 billion of a
$13.4 billion loan package and keep the $9.4 billion it has already
received in bailout funds. GM also needs to win concessions from the
UAW, get its creditors to slash its $63 billion in debt, and show how it
will be a viable company. Says Deutsche Bank Securities analyst Rod
Lache: "There's a lot of risk that this won't happen. That's why we have
GM's stock at a target price of zero."
Bondholders Not All Keen on Equity
Here's why. When GM presented its plan to Congress on Dec. 2, President
and COO Frederick A. Henderson said GM would offer a debt-for-equity
exchange, trading enough stock to get the company's debt from $63
billion down to about $30 billion. Unsecured creditors would take notes
worth 30¢ on the dollar and stock.
But sources close to a committee representing many bondholders say some
creditors aren't all that keen to get equity in GM and they would like a
smaller discount on their bonds. GM's stock may not rebound, and in a
bankruptcy their stock holdings would be wiped out.
Whether GM can get its unsecured creditors, who collectively hold $31.5
billion of its $63 billion in debt, to renegotiate may depend on what
the UAW is willing to give. GM has already talked about giving the UAW
equity for half of the $20 billion the company owes the union for a
retiree health-care trust fund.
Unsecured Creditors at Risk
Sources close to some bondholders say that they are unhappy the UAW is
being offered 50¢ on the dollar for its GM debt while they are being
offered 30¢ on the dollar. "The bondholders are furious that the UAW
could swap its debt for equity at 50¢," says Sean McAlinden, chief
economist at the Center for Automotive Research.
There is talk among some bondholders that they may be able to get 30% on
their holdings in bankruptcy court, but the judge may force a tougher
restructuring than the government. So they would end up with equal value
bonds, but in a company that has been restructured more severely. It is
unclear which bondholders are digging in since they are not talking
publicly. But Lache says some of them have insured their bonds with
credit default swaps, which pay out the principal if GM can't pay the
premium. Those note holders have less incentive to agree to a deal,
But getting them to take GM's offer will depend on whom they believe.
Some bondholders bought the debt at between 12¢ and 25¢on the dollar.
They already are making a nice return since they bought the bonds so
cheaply, and they figure they could break even in bankruptcy court.
Others are saying they can do better in bankruptcy court. But McAlinden
thinks that such talk is just posturing. They will have a tough time
recouping the 30% that GM has offered. Says McAlinden: "Bankruptcy
judges can be rough on unsecured creditors."
Vendors Ahead of Creditors?
They're also standing in line behind quite a few other lenders. GM has
$11.8 billion in secured debt. Those borrowers come first. Next comes
government claims for the $9.4 billion already given to GM by the
Treasury Dept. If GM submits a satisfactory plan to the Obama
Administration on Feb. 17, Treasury will loan GM another $4 billion. The
Energy Dept. may give GM $6 billion in financing to retool plants to
make more efficient cars. The bondholders get paid after them. All told,
GM could have $80 billion in debt if it doesn't get its current
liabilities restructured, Lache says.
Plus, many of GM's suppliers may be deemed essential vendors by a
bankruptcy judge and would get paid before any creditors, says Don
Workman, a bankruptcy attorney with Baker & Hostetler in Washington.
While bondholders held out in recent cases like that of parts maker
Metaldyne for a better deal, Workman thinks that "they're rattling the
saber for a better deal," he says.
Some of the bondholders plan to push for more union concessions before
they accept a deal. GM is already locked in talks with the UAW over
possible concessions. UAW President Ron Gettelfinger does not want to
open the 2007 labor contract, McAlinden says. The union already dropped
the jobs bank, a paid-furlough clause that gives workers most of their
pay when they are laid off. The union is also conceding jobs through
Skilled Trades Workers May Go
But other concessions like health-care benefits and job classifications
are being discussed. Right now, 23% of GM's workforce is composed of
skilled trades workers such as electricians, plumbers, and the like who
make more than line workers. Toyota's (TM) plants get by with half that
level. So GM may want to get rid of some of those workers.
In any case, it looks like GM, the UAW, and bondholders will have some
time to hash things over. President Obama has not named a car czar yet.
So even though GM plans to get its application in on Feb. 17, there may
not be anyone to review it.
Lache says some GM bondholders will take the deal. Whether GM can get
all of the debt restructuring it needs just depends on how many.