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Last updated: May 2, 2009 12:20 am
General Motors could follow its smaller Detroit neighbour into bankruptcy before the end of the month, with the Obama administration struggling to corral a disparate group of debtholders into accepting an out-of-court restructuring.
“I think there are enormous challenges to completing the GM restructuring out of bankruptcy,” said an administration official, who added that, in spite of the hostility from some bondholders, it was in their own interests to take a deal.
The task force and GM have come up with a plan that would see bondholders exchange $27bn in unsecured loans for a 10 per cent equity stake, much less than the creditors’ suggestion of a 58 per cent stake and less than the government and the United Auto Workers.
“I actually am somewhat optimistic that they [a core group representing more than a third of the $27bn unsecured debt] will recognise that a bankruptcy for GM is not going to be positive for the company and therefore not going to be positive for them.”
However, he acknowledged: “I think the challenge for General Motors is can you get enough co-operation given just how widely held the debt is and how many players there are.”
Debtholders opened talks with the Obama administration’s auto task force, but confusion and concern are the dominant moods as they draw lessons from Chrysler’s recent filing for bankruptcy protection.
A group of bondholders presented their own restructuring plan to the task force on Thursday and Friday expressed satisfaction that talks had begun after complaining for weeks of being shut out.
A senior administration official said this week that GM was always due to become the priority at this point following a decision on Chrysler, GM’s smaller Detroit neighbour. But that decision holds precious few signs of hope for GM’s bondholders.
The UAW’s voluntary employees’ beneficiary association – which pays retirees’ healthcare – would take almost 40 per cent of the restructured company’s equity, a divergence that has left bondholders crying foul.
But the administration official on Friday argued that “they should focus more on what their recovery’s going to be and less on what their neighbours are getting”.
He said that workers turning up to work were vital to the group’s future and argued that this point was not political and would apply in an ordinary bankruptcy.
If GM filed for bankruptcy and separated into a “new” and “old” company, pulling the “new” group with its good assets out of bankruptcy quickly, bondholders would be left to pick over the old assets.
“The pressure on the GM bondholders is that if this [swap offer] doesn’t go through, they may risk getting nothing,” one person close to the matter said.
“The workout of the old company . . . [will take] years and years. The distribution to bondholders then would be almost zero in today’s terms. But because they’re being offered so little, they would still rather roll the dice.”
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