GM Restructures Debt to Avoid Bankruptcy

The General Motors (GM) saga continued on the morning of April 27, with CEO Fritz Henderson announcing an offer to convert more than $27 billion of debt into equity. GM said it would give current bondholders 225 shares for every $1,000 of debt held, which equates to approximately $0.40 on the dollar. The Company is hoping that it can convert more than an additional $20 billion of debt from the Treasury and UAW ($10 billion each).

Under the restructuring, the U.S. Treasury would extend an additional $11.6 billion of loans to GM, in addition to the $15.4 billion in existing loans. In exchange for the equity in a restructured GM, the government would forgive half the debt. Furthermore, the Company would issue $10 billion in stock to the UAW to fund its VEBA account (instead of the $20.4 billion worth of cash).

The exchange for the current bondholders will commence only if 90% agree to the terms. Under the plan, if GM fails to get adequate participation, it will file for bankruptcy protection.

In addition to the debt conversion, GM announced that it is phasing out its Pontiac brand, closing 13 more plants, and reducing its dealer count by more than 42% to 3,605 by the end of 2010, compared to the 6,246 that are currently open in the United States. GM also announced it would shut almost 300 dealerships in Canada.

This is a further reduction of 500 dealers and is four years sooner than the February 17 Plan. The job cuts go deeper than previously announced, and more hourly (and salaried) workers will be slashed. The hourly job cuts will reduce GM's U.S. work force by 7,000 more workers than those outlined in the February viability plan, to 40,000 from 61,000 by 2010.

All in all, the plan needs 90% of bondholders to accept the deal, and if the Company doesn't achieve this, the rest of the plan is a moot point. We believe that General Motors will file for Chapter 11 bankruptcy before the June 1 viability deadline imposed by the auto task force. Mr. Henderson basically drew a line in the sand for his bondholders to either accept the deal or the Company will go bankrupt.

It is disheartening that, even on the brink of bankruptcy, the government is willing to give $11.4 billion more of the tax payers' money to help prop up a sinking ship.

My extremely optimistic view is that by this time next year (if everything goes right for the Company, which is doubtful) GM will emerge from bankruptcy with four core brands (Chevrolet, Cadillac, GMC, and Buick). If the economy doesn't begin to rebound by the end of 2009 or if the dealerships, which are expected to be closed, put up a big fight, then that June 2010 emergence from bankruptcy could be pushed back even further.

Hopefully, all the foundations and plans the administration and management have been making will help to speed up the filing, but if past history has been any indication of future performance, 2011 is the more likely the timeframe that the Company will re-emerge from bankruptcy.

Written by David Silver, a Research Analyst for Wall Street Strategies (www.wstreet.com) covering companies in the Transports, Autos, and Beverage sectors.

Disclosure: None

Comments

[Fritz Hende...:]

225 "new" GM-shares are NOT 0,40 Cent on the dollar!!!!!

The dead-on arrivel offer is designed to pretend this!!!

There will be 100 times more shares, this is necessary to bring the actual shareholders to 1 %. Today we have 611 million share, there will be 61 billions!!

In reality one new share will have the value of 1-4 cents, it depends on restructering terms, GM earning situation, market situation.

So more likely the bondholders will get one or two cents on the dollar. REJECT!!!!!

To say in court they may get less is the joke of the year.

Apr 29 06:05 AM

[Fritz Hende...:]

excuse me, I meant: 225 new shares are NOT 0,40 $ (recovery) on the dollar (for GM-bondholders).

Apr 29 06:13 AM

[User 386342:]

The terms of the bond exchange provide for 225 shares of NYSE:GM for each $1,000 in principal debt exchanged, which one might argue at todays stock price equates to $0.40 on the dollar, but before the shares are issued, they are subject to a 100 to 1 reverse split with fractional amouts rounded down. Do the math. That means those 225 shares become 2 shares.

Anyone suggesting bondholders are being offered 40 cents on the dollar is suggesting NYSE:GM stock, now trading around $2.00 per share will, after the exchange trade for around $200.

Also, look at the ratios. Why, if bondhlders can really expect a 40% recovery of $27 billion from 10% of the new equity does the government divide 90% of equity to themselves and the union to cover only $20 billion of the combined government bridge loan and VEBA settlement? They issue themselves nine times the equity to cover less debt than the bondholders are owed.

By the 40 cents on the dollar math, the government should see a huge windfall with their shares, no?

The offer is deceptive and is not being accurately described by media. What ever happened to fiduciary duty to creditors in the insolvency zone? And despite government's claims to the contrary, they are NOT the largest lender to GM. The bondholders are far and away GM's biggest lender - and not with bridge loans to an insolvent GM either.

(Patiently awaiting due diligence FOIA requests by responsible parties on Executive Branch management of GM in advance of the landmark courtroom battles sure to come. Either we now live in a country where the government can just barrel in a dictate terms, or we still have a Constitutional republic that limits the powers of government to effectively sieze property without just compensation)

Pax et bonum

Apr 29 07:13 AM

[NeverShort:]

The author of this drivel obviously sees no hypocrisy in his statement in paragraph seven: "It is disheartening that, even on the brink of bankruptcy, the government is willing to give $11.4 billion more of the tax payers' money to help prop up a sinking ship."

What?!? Disheartening is that GM is getting the monetary equivalent of a grain of sand while the author writes this article somewhere from the banking beach on Wall Street. Unbelievable.

Apr 29 07:43 AM

[casey00001:]

Charles Payne(of Wall St. Strategies) is a bright guy. Did he proofread this article before it got sent to print? Its completely full of factual errors. No way he would go on Fox News and spew this kind of garbage.

Apr 29 08:31 AM

[Mister Jimmy:]

Agree completely with JustPrintMoreMoney. I am so weary of Wall Street experts offering up their "wisdom" on the auto industry. This crowd of greedy, self-centered "masters of the universe" have almost single-handedly brought the global economy to brink of collapse. All they are capable of is creating and churning worthless financial instruments, raping 401K's, and creating Ponzi schemes. Yet, they know all about the complexities of the auto industry. Why don't all of you Manhattanites just drive out to the Hamptons this weekend and directly into the Long Island Sound?

Apr 29 08:32 AM

[mcl_mixer:]

Based on the latest offer, it looks like the Treasury wants this to end up in the courts. In the next few days we'll see if the Chrysler bondholders have the cojones to stand up to Obama's goon squad. As far as I'm concerned, the they can have my GM bonds when the bankruptcy courts pries them out of my hands.

Apr 29 08:34 AM

[babyray:]

The biggest bondholders of the automakers are the same banks and insurance companies that got us in this economic mess in the first place. its time for them to take a major haircut. The UAW has already opened up their contract twice in the last 4 years!!!

Apr 29 08:46 AM

[Auto Guy:]

There you go again User 286342 expecting that we are still honoring the rule of law and fiduciary responsiblities. We tossed both of those out between the AIG bonuses and the BofA "keep quiet" scandals. I do sort of remember that there is some responsibilities of the directors and officers of a company in the zone of insolvency......what were those again? oh, ya....due to creditors in order of claim on your company. I guess we threw that out too.


On Apr 29 07:13 AM User 386342 wrote:

> The terms of the bond exchange provide for 225 shares of NYSE:GM
> for each $1,000 in principal debt exchanged, which one might argue
> at todays stock price equates to $0.40 on the dollar, but before
> the shares are issued, they are subject to a 100 to 1 reverse split
> with fractional amouts rounded down. Do the math. That means those
> 225 shares become 2 shares.
>
> Anyone suggesting bondholders are being offered 40 cents on the dollar
> is suggesting NYSE:GM stock, now trading around $2.00 per share will,
> after the exchange trade for around $200.
>
> Also, look at the ratios. Why, if bondhlders can really expect a
> 40% recovery of $27 billion from 10% of the new equity does the government
> divide 90% of equity to themselves and the union to cover only $20
> billion of the combined government bridge loan and VEBA settlement?
> They issue themselves nine times the equity to cover less debt than
> the bondholders are owed.
>
> By the 40 cents on the dollar math, the government should see a huge
> windfall with their shares, no?
>
> The offer is deceptive and is not being accurately described by media.
> What ever happened to fiduciary duty to creditors in the insolvency
> zone? And despite government's claims to the contrary, they are NOT
> the largest lender to GM. The bondholders are far and away GM's biggest
> lender - and not with bridge loans to an insolvent GM either.
>
> (Patiently awaiting due diligence FOIA requests by responsible parties
> on Executive Branch management of GM in advance of the landmark courtroom
> battles sure to come. Either we now live in a country where the government
> can just barrel in a dictate terms, or we still have a Constitutional
> republic that limits the powers of government to effectively sieze
> property without just compensation)
>
> Pax et bonum

Apr 29 10:48 AM

[Fritz Hende...:]

The most interesting question for bondholders is: How much is the GM-offer worth?
So anybody can make his decision.

We have now 611 million shares on the market. Forgiving debt means infusion of new capital.
The actual bondholders will be reduced to 1 %. That means there will be 61 billion shares after restructering. Let aside split reversal. The bondholder will hold 10 % of GM equity = 6,1 billion shares.

The only variable is to forecast the market capitalisation of "New GM".

Ford has about 15 billion in the moment. If GM had the same market capitalisation after restructured, the value of one share will be 25 cent/share.

That makes 225 x 0,25 $ = 56 $ for 1000 $ bond face value.
Or 5,6 cent on the $. (without interest pay which will differ, without los of reversal splitting)


If GM could be very profitable within 2, 3 years, the market capitalisation may be 100 billions. This means 225 x 1,67 $ = 376 $ for 1000 $ bond face value.
Or 37,6 cent on the $. (without interest pay which will differ, without los of reversal splitting)


These are very clear facts and I wonder, because nobody is publishing. Thank you all guys, newspapers and websites very much for your personal opinions, but bondholder have first to know the facts what they can expect.
Unfortunally nice Mr. St.Pierre is wrong when he thinks, there will be 46 cents on the dollar.


Hint for artists who make caricatures: World of Half-Life. A weak man, looks like Fritz Henderson (GM), tumbling around, a headcrab on his head, the headcrab looks like Mr. Rattner, is whispering to Henderson: "Look out for bondholders, get them all, ...."

Apr 29 11:58 AM

[rffrydr:]

"Agree completely with JustPrintMoreMoney. I am so weary of Wall Street experts offering up their "wisdom" on the auto industry. This crowd of greedy, self-centered "masters of the universe" have almost single-handedly brought the global economy to brink of collapse. All they are capable of is creating and churning worthless financial instruments, raping 401K's, and creating Ponzi schemes. Yet, they know all about the complexities of the auto industry. Why don't all of you Manhattanites just drive out to the Hamptons this weekend and directly into the Long Island Sound?"

--If we all drove audis no-one would drive audis.

Apr 29 02:28 PM

[wsmwho:]

DEBT CONVERSION
creditor will get 2.25 shares of new stock per $1.000
UAW will get 23.4 shares of new stock
The government will get 30 shares of new stock
Is this an equal exchange for all parties?

Apr 29 03:17 PM

[Mad Hedge F...:]

They have no choice. General Motors (GM) CEO Fritz Henderson made known his final, final, last ditch offer to avoid bankruptcy. Owners of $27 billion of bonds will get 10% of the company. The unions will get 39% of the company. Pontiac will be axed. Six more plants will be closed, laying off 21,000 workers. What will happen to 3,900 dealers is still up in the air. With the stock now at $2, Fritz has very little to bargain with. Whatever car business survives this won’t look anything like the GM we know. Why do I think we are headed towards a Ford (F) only nation?

Apr 29 06:12 PM

[Mister Jimmy:]

Mad Hedge Fund Trader, now if only we could figure out a way to rid our nation of Wall Street thieves like you.

Apr 30 08:18 AM