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GM vision: Lighter debt load, mostly U.S.-owned

Friday, May 29, 2009

DETROIT -- The government's new road map for General Motors would briefly send it into bankruptcy, erase most of its debt and eventually have it emerge leaner and stronger -- and almost three-quarters owned by the taxpayers.

The outline came together Thursday after a bloc of GM's biggest bondholders agreed to a sweetened deal proposed by the Treasury Department to wipe out the automaker's unsecured debt in exchange for company stock.

But GM still must settle on a buyer for its European Opel unit and decide the fate of its Hummer and Saturn brands, while workers across the country await news expected Monday on which 14 plants the company will close, shedding 21,000 more jobs.

Efforts to sever its relationship with 2,600 dealers would probably be tied up in the bankruptcy proceedings.

A person familiar with GM's plans said it was "probable" that the company would file for bankruptcy protection Monday -- the government's deadline for GM to restructure. The person did not want to be identified because the plans were still under discussion with the U.S. and Canadian governments.

Under the proposal, outlined in a regulatory filing, GM's good and bad assets would be separated under what the Obama administration hopes will be a speedy Chapter 11 reorganization that will let GM thrive when people are ready to buy cars again.

The U.S. Treasury, which already has loaned GM $19.4 billion, would get 72.5 percent of the new company's stock and provide $30 billion in additional financing to keep the new GM operating under bankruptcy protection.

Canada's government is expected to provide an additional $9 billion, a senior Obama administration official said. The official spoke on condition of anonymity because of the sensitivity of the negotiations.

A United Auto Workers trust that will take over retiree health-care expenses will get 17.5 percent, and the old GM, effectively owned by the bondholders, would get a 10 percent stake.

GM's existing shareholders will probably lose everything. "It's fair to say that there would be little to no recovery," the administration official said.

The proposal is similar to what has happened to Chrysler, already in Chapter 11 protection. A bankruptcy judge is weighing whether to approve the sale of most of its assets to Italian carmaker Fiat.

The administration official estimated that GM would be under bankruptcy protection for 60 to 90 days, longer than Chrysler's expected reorganization because GM is bigger and more complex.

The official said that although the government hopes to get back as much of the money loaned to GM and Chrysler as possible, it never envisioned recovering much of the initial $13.4 billion in aid.

Eventually, the government hopes, GM can return to profitability, which would allow the government to sell its GM stock. But the risks for taxpayers are daunting, with U.S. auto sales near their lowest level in 27 years.

"We will come out of this rid of some of the historic legacy costs that have been dragging us down for the last 20 years or so," GM vice chairman Bob Lutz said Thursday at an Automotive Press Association luncheon in Detroit. "We will come out of it with an all-new focus on product development."

GM plans to cut the nameplates it sells in North America by one-fourth and keep only four brands -- Chevrolet, Cadillac, GMC and Buick -- after jettisoning Hummer, Saturn, Pontiac and Saab.

10 percent

Under the government's offer, bondholders would get 10 percent of the stock in a newly formed GM, the same as a proposal that they shunned earlier this week. But the new offer also gives them warrants to buy an additional 15 percent stake, possibly at a discount.

That would come only if they agree to support selling GM's assets to a new company under bankruptcy court protection.

The revised offer amounted to an ultimatum: Go along with the government auto task force's proposal or face substantial reduction in the amount of stock and warrants they will get.

"They have sweetened the deal by adding the warrants to the equation," said Pete Hastings, senior analyst with Morgan Keegan & Co. "It's enough for me to have moved from rejecting the deal and trying our luck in bankruptcy court to the side of recommending the deal."

A bloc of bondholders who represent about 20 percent of GM's $27 billion in unsecured debt called the deal unfair but said they'll take it rather than roll the dice in bankruptcy court and risk getting even less.

A coalition of smaller bondholders, meanwhile, opposed the offer, saying it remained unfair to retirees who depend on GM bonds for income and was overly favorable to the UAW.

Union President Ron Gettelfinger said in a telephone interview he did not want to get into a debate with bondholders while the union was pushing for ratification of concessions to GM. Union members were to wrap up voting today.

"An objective person that stood back and looked at all the sacrifices that have been made by active workers and retirees would see that we have made tremendous sacrifice," he said. The union's role, he said, was to get the best deal it could for active members and retirees.

The filing didn't specify how many bondholders would be needed to make the deal work. The government had demanded that 90 percent agree to the previous offer, and it fell far short.

The Obama administration official said the government would not require a specific percentage of bondholders to approve the new proposal but would make a judgment call based on the level of support.

Representatives of the committee of larger bondholders were trying to contact the thousands of GM bondholders before a deadline of 5 p.m. Saturday.

The government plan envisions the slimmed-down new GM with $17 billion in long-term debt and $9 billion in debt-like preferred shares. That would be 61 percent less than its debt load now.

Only $8 billion of the existing U.S. government loans would remain on the books. The remainder would be converted into equity and preferred shares.

The Obama administration official said the holders of GM's $6 billion in secured debt would be "protected" but declined to elaborate.

Trading of GM shares was halted for a short time Thursday morning. They fell 3 cents to $1.12 after a day of volatile trading.


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