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GM faces bankruptcy as bondholder offer fails

(Agencies)
Updated: 2009-05-27 21:50

German Chancellor Angela Merkel and Foreign Minister Frank-Walter Steinmeier arrive for the weekly cabinet meeting in Berlin, May 27, 2009. [Agencies]

Chrysler filed for bankruptcy protection April 30, after the government ended talks with a group of holdout bondholders.

Automakers worldwide are struggling as the global recession has reduced demand for new vehicles. But GM and Chrysler have been particularly hobbled by promises to cover the health and pension costs of tens of thousands of unionized retirees -- along with recent record-high gasoline prices that reduced demand for their low-mileage trucks and SUVs.

Full coverage:  Global Auto Industry Woes Related readings:  US likely taking majority ownership of GM  Make-or-break week for GM as deadline nears  Fate of GM lies with recalcitrant bondholders  US auto unions make tentative deal with GM, Treasury  More auto cuts: GM will eliminate 1,100 US dealers

When GM announced its debt exchange last month, the company offered bondholders 225 shares of common stock for every US$1,000 in debt -- or a 10 percent stake in the restructured company. In addition to the UAW's share, the federal government was to take 50 percent for exchanging a combined US$20 billion of their debt to equity. Current stockholders would end up owning just 1 percent of the company.

A committee representing GM's biggest bondholders -- mostnvestors like retirees and families -- have also railed against the terms of the exchange. Both groups say the offer gives them too small a stake for the amount they are owed.

GM had said previously that the government was preventing it from offering bondholders more than 10 percent of the restructured company.

Some analysts said GM's bondholders may be holding out for better terms in bankruptcy. Stephen Lubben, a law professor at Seton Hall University, said unsecured creditors like bondholders often recover 40 percent of their investment in bankruptcy.

"They may not do much better, but they can't do any worse," he said.

Another factor complicating the decision of GM's bondholders: Many large investors hold insurance policies on their bonds known as credit default swaps. Such policies would reimburse bondholders in the event of a "credit event" like a bankruptcy filing.

Investors who hold credit default swaps on GM debt stand to make about US$2.33 billion if the insurance contracts are triggered, according to the Depository Trust & Clearing Corp.

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