How Can GM Bondholders Be Bailed In?

Is a bankruptcy for GM not only an option, now, but a necessity? At least one of Bloomberg's interviewees thinks so:

The Democrats' goal of preserving a U.S. auto industry is not doable without a bankruptcy, said Lynn LoPucki, who teaches bankruptcy law at Harvard University and the University of California at Los Angeles.

"A workout requires everybody's agreement," he said. "If I own bonds, GM can't force me to take less than 100 cents on the dollar outside of bankruptcy court. Bankruptcy is the only thing that can work because GM and the government need the ability to force people to go along with the plan. Paying everyone in full is prohibitively expensive."

This is exactly the question that I was asking Troy Clarke about Wednesday. Of course any company can offer to its bondholders some kind of debt-for-equity swap at any time: Aiden, in the comments to that blog, mentioned Foster Wheeler and AbitibiBowater as precedents. But given the enormity of GM's debt obligations, and the strong temptation for any bondholder to attempt to free-ride on a bond swap and get paid out in full after everybody else takes the offer, what would the chances of success be?

There is another precedent, however: the Chrysler bailout of 1981. That bailed in bondholders without formal bankruptcy, so it can be done. Does anybody know what the formal mechanism was in that case?

Update: A GM spokesman just emailed me the company's official take on this question, which does seem to point in the direction of some kind of debt-for-equity swap:

Our plan is to convert $62B of debt to approximately $30B in outstanding debt. About $20B of the current liability is the present value of obligated payments to the UAW VEBA (the health care costs that the UAW is about to pick up).
A bankruptcy would not provide any assurances to bond holders, who could likely end up receiving minimal value for their claims in a bankruptcy. In fact, the bonds are already trading at these levels (pennies on the dollar). We believe that the capital restructuring approach outlined in our Plan would provide the best avenue to return value to bondholders by providing them an option to take a restructured stake in a viable entity in return for their current securities.

We have successfully and recently executed similar transactions, for example a pair of debt for equity exchanges in September in which we exchanged $500 million of convertible bonds into equity. We believe there is appetite by debt and bond holders to pursue this course of action, and are in discussions with our advisors to develop the best structure with the best probability of success. Finally, we believe the involvement of a federal oversight board, will help to facilitate the process.

Comments

[AlexS:]

My plan is to write to the bank that holds my mortgage and offer to exchange my $100K mortgage for a $50K mortgage. Then I will write to the bank and offer to exchange my $50K mortgage for a $25K mortgage. Then I will .....

2008 Dec 04 01:16 PM

[papillon:]

Bond Holders are to unite and make sure that GM does all it can to avoid bankruptcy including cropping the sub-firms that can thus raise cash . GM can still compete in various markets as outlined by The Economist magazine . It needs a plan now , but actually it needed a plan long time ago .. Where was Top Management at that time ... Bond Holders were there with their money and they have to take it back ! Pensioners will be at risk as Hedge funds falter with low re-payment of bonds . What is the equity being swapped ? A car for people with ca. 30,000 US$ bonds and the bond holders with much more bond holding ?

2008 Dec 04 02:20 PM

[Jerry Wesner:]

I own a GM Bond and wonder why GM could not swap the bonds (dollar for dollar) that you paid for these bonds on the purchase of a GM auto, looks like it would be a win-win for the interested bond holder and GM. they would sell the car (reduce inventory & debt) and the bond holder would get at least a new auto (or two) (GM) for the bond. You could do it through the dealers and they would also win.

2008 Dec 10 08:59 AM