The risk of a General Motors Corp bankruptcy is rising, causing
bondholders to pursue independent strategies to protect their interests
if GM's survival battle moves to bankruptcy court, two sources close to
the government talks with GM said on Tuesday.
The Obama administration's auto task force led by Steven Rattner is
in its second week of talks in Detroit in an effort to revamp GM's
restructuring plan and wrest concessions from bondholders and labor,
and is preparing a reduced term sheet for GM bondholders for about $28
billion of unsecured debt.
Until now, a 10-member bondholder committee has shown a united
front, but cracks may be starting to show, leading to independent
bankruptcy strategies, according to two sources familiar with the group.
With about 45 days for GM to present new restructuring plans before
the government's June 1 deadline, creditors are beginning to shift
tactics to prepare for a possible Chapter 11 filing.
GM creditors specifically have expressed frustration over the lack
of direct communication from the U.S. government or from GM in their
Bankruptcy court is a big unknown, and saying that we'll be in and
out within two months doesn't sit right, said one person close to the
bondholder committee, referring to the surgical bankruptcy scenario
U.S. officials have described as an option for the automaker.
At least one large bondholder is preparing for potential bankruptcy
by reviewing which courts may be most favorable to bondholders, and has
ruled out the Eastern District of Michigan as being more favorable to
the United Auto Workers union, according to a second source familiar
with the talks.
The perception is that GM and the union would have a home court
advantage in Michigan, and that the issue may draw protests in Detroit
and enflame emotional confrontations, as opposed to a potential filing
in New York or Delaware, that person said.
The government seems on track to direct this to a controlled
bankruptcy, said Shelly Lombard, senior high-yield analyst with
research firm Gimme Credit headquartered in New York. The key question
is how can bondholders extract value. They don't have a lot of leverage
or options other than lawsuits.
GM bonds were the second most actively traded in the high-yield bond
market, with GM's 8.375 percent notes due in 2033 dropping almost 1
cent on the dollar on Tuesday to 9 cents, yielding more than 91
percent, according to MarketAxess data. They traded as high as 20 cents
In negotiations with bondholders, GM last month offered 8 cents cash
on the dollar, 16 cents on the dollar in new unsecured debt, and a 90
percent stake in the automaker, according to one person who saw the
A new offer may include no cash, no new debt and perhaps as little
as 10 percent equity in the company, which may amount to almost zero
recovery value for bondholders, Lombard said.
These investors are starting to consult advisers on their own, but
ultimately in a capital structure bondholders can probably cut a better
deal as a group, she said.
GM already faces a lawsuit in Canada from unsecured bondholders over
dividends GM paid from a Nova Scotia unit last May to its U.S.
operations, according to court documents.
Those bondholders claim the company wrongfully pulled around $600
million from the Canadian subsidiary because company officials should
have known the U.S. business was near insolvency, the documents said.
More legal battles are likely, according to Lombard and bondholders.
The goal is to have an honest negotiation and that's what we're
holding out for, one source said, who declined to be named due to the
confidential nature of the negotiations. An out-of-court scenario is
becoming less and less likely with each passing day.
GM's shares, which traded above $24 a year ago, rose 4 percent on Tuesday to $1.78.
(Editing by Leslie Adler)