GM Bankruptcy Probable as Obama Favors UAW Against Bondholders

GM Bankruptcy Probable as Obama Favors UAW Against Bondholders


May 4 (Bloomberg) -- General Motors Corp. may be more likely to end up in bankruptcy based on the Obama administration’s willingness to place Chrysler LLC into court protection to safeguard union health-care benefits.

With GM and its biggest bondholders at odds over resolving $27 billion in unsecured claims by a June 1 deadline, the Chrysler model indicates that President Barack Obama may resort to bankruptcy to end any impasse over that debt, said Martin Fridson, chief executive officer of New York-based credit investment firm Fridson Investment Advisors.

Chrysler filed for protection April 30 after the U.S. was unable to persuade secured lenders to swap $6.9 billion in claims for $2.25 billion in cash. A union retiree health-care trust was offered a 55 percent stake in Chrysler.

“This confirms the fear, which right along has been that the Obama administration is more sensitive or beholden to the unions than the bondholders,” he said. “It makes it clear that GM bondholders aren’t likely to be able to work out anything outside of bankruptcy.”

GM bondholders proposed April 30 they get a 58 percent ownership stake in the Detroit-based automaker in exchange for their $27 billion in unsecured claims. Bondholders are objecting to GM’s proposal they get a 10 percent share of GM equity while a union health fund would get $10 billion in cash and as much as a 39 percent stake for their $20 billion in unsecured claims.

Renee Rashid-Merem, a GM spokeswoman, Roger Kerson, a UAW spokesman, and Jenni Engebretsen, a Treasury spokeswoman, declined to comment on the matter. A spokesman for the bondholders could not be reached immediately.

Dry Run for GM

GM said last week it must cut $44 billion in obligations from its books, including $10 billion of loans from the U.S. government, to return to an operating profit next year and win permission from the Obama administration to keep $15.4 billion in loans and win $11.6 billion more.

“There’s no question Chrysler” acts as a dry run for GM, said Sean Egan, president of Egan-Jones Ratings Co. in Haverford, Pennsylvania. “It was designed that way because Chrysler is a much more manageable entity. The impact on the economy, on employment, is a microcosm of what is likely to happen with GM.”

GM’s $3 billion of 8.375 percent bonds maturing in July 2033 fell to a record low of 8.3 cents on the dollar April 30, down from 21 cents at the beginning of this year, according to Trace, the bond-price reporting system of the Financial Industry Regulatory Authority. The debt traded May 1 at 8.6 cents to yield about 95 percent.

Competing Concepts

GM proposed that bondholders exchange 225 shares of stock for each $1,000 of principal. At least 90 percent must accept the offer to shed enough debt for the automaker’s plan to work.

In the counterproposal by the ad hoc committee of GM bondholders, they would get 58 percent of the stock in a reorganized GM, with 41 percent going to a union health-care trust and the last 1 percent to existing shareholders.

The committee had been in contact with about 100 institutions representing $12 billion in GM debt including San Mateo, California-based Franklin Resources Inc. and Loomis Sayles & Co. of Boston, a person familiar with the negotiations has said.

Even if there is appetite for an agreement, it’s unlikely the thousands of GM bondholders can be pulled together in time, said John Casesa, managing partner at New York-based consulting firm Casesa Shapiro Group.

“The Chrysler bankruptcy can either scare them into settling or maybe make them more likely to take GM into bankruptcy,” Casesa said. “I don’t get the sense that the bondholders are ready to give in.”

Government Role

Obama’s auto task force ousted Chief Executive Officer Rick Wagoner at the end of March, saying GM’s plan to return to profit wasn’t aggressive enough, and ordered new CEO Fritz Henderson to cut the automaker’s debt by more than initially demanded.

The U.S., which would hold at least half the equity in a reorganized GM in the automaker’s proposal, also ordered acting Chairman Kent Kresa to replace the majority of the GM directors as soon as possible.

“Obama has said the government doesn’t want to run a car company, so why not take the bondholders’ deal, which gets them out of ownership?” said Pete Hastings, a fixed-income analyst at Morgan Keegan & Co. in Memphis, Tennessee. “The 10 percent ownership offer is ridiculous, so their best shot is to try and win in court.”

‘Labor’s Interest’

The bondholders shouldn’t be surprised that the unions are getting preference over investors in an Obama administration, Egan said.

“If the government is providing money to these entities, they’re going to be looking out for labor’s interest first and foremost,” he said.

“ You may claim it’s unfair, but that’s the political reality and the time and cost of suing the federal government is prohibitive in most cases.”

The government was more likely to get its way in Chrysler because a majority of lenders were already supportive of the U.S. offer for their debt, said Mirko Mikelic, who helps manage $19 billion at Fifth Third Asset Management in Grand Rapids, Michigan. Mikelic dumped GM debt last year and still manages some debt in GMAC LLC, the automaker’s former finance unit. There seems to be little likelihood of a similar majority agreement at GM, he said.

The longer the GM bondholders have held out, the worse the offers have gotten, according to Egan.

BLOOMBERG