General Motors Corp said on Thursday it had reached a deal with major bondholders that would give them a bigger stake in a reorganized and effectively nationalized automaker and could pave the way for a fast-track bankruptcy by GM within days.
The announcement was the clearest indication yet that GM, the No. 1 U.S. automaker, is close to filing for bankruptcy under the direction of the Obama administration. It would be the biggest-ever bankruptcy for a U.S. industrial company.
The new GM would be more than 70 percent owned by the U.S. Treasury, which would agree to provide at least another $40 billion in capital to the company.
Under the terms of the unprecedented transaction, the Obama administration would create and fund a new company to buy GM's key assets out of bankruptcy in the final chapter of the 100-year-old automaker's long decline.
Bondholders representing about $27 billion in GM's bond debt would be offered 10 percent of a reorganized company. Those were the same terms they were offered earlier this week in a debt exchange that failed.
But in a sweetener, bondholders would also receive warrants to acquire another 15 percent of the equity in the new GM, provided they support a quick Treasury-backed sale process similar to one now being used for rival Chrysler.
GM bondholders now have until 5 p.m. EDT on Saturday to indicate they will not try to block a bankruptcy sale process.
It's likely the best option on the table as it's probably as good a deal as is going to be made available, said Pete Hastings, a fixed income analyst at Morgan Keegan.
We urged that our clients reject the previous offer. But we'll probably urge that institutional investors sign on to this one, he said.
It was not clear how much support U.S. officials were targeting from investors. GM said that if too few creditors signed on to the deal, the ownership stake offered to bondholders could be slashed.
The message is that we have a better deal for you, but if you don't take it then all bets are off, said IHS Global Insight analyst Aaron Bragman.
A committee representing GM's major bondholders with about $5.4 billion of debt said they supported the revised offer as the the best alternative ... in the current difficult and dire situation.
Andrew Denatale, a lawyer with Stroock & Stroock & Lavan, said GM would need bondholders with two-thirds of its total bond debt and a majority of investors to support the plan in bankruptcy.
There's no downside for GM or the government in attempting to get as much of the credit constituency on board now, Denatale said. It would make the process easier.
OWNERSHIP AND DEBT DETAILED
The U.S. Treasury would own 72.5 percent of the new GM coming out of a bankruptcy sale process while a trust affiliated with the United Auto Workers union would own 17.5 percent, GM said in a filing with securities regulators.
The governments of Canada and Ontario are in discussions with U.S. officials and could take some of the equity stake or debt from the U.S. government's allocation, a person with direct knowledge of the process said.
The U.S. government has become the largest lender to GM as it slides toward insolvency and about $50 billion in U.S. Treasury loans would be converted into equity during its restructuring.
The U.S. government would also hold $8 billion of debt and $2.5 billion in perpetual preferred stock, suggesting total funding from the government of nearly $60 billion.
GM has so far taken $19.4 billion in emergency U.S. government loans. The remainder would be provided in new financing and financing for the GM bankruptcy process.
Once seen as an emblem of U.S. industrial strength, GM has lost $88 billion since 2005 as auto sales began to slow in its home market. Its financial problems deepened when the credit crisis of late 2008 shut down vehicle financing.
At its peak in 1980, GM controlled 45 percent of the U.S. auto market. That dropped to 19 percent in the first four months of this year and GM lost its mantle as the global auto sales leader to Toyota Motor Corp in 2008 as its crisis deepened.
GM's bondholders have been advised by law firm Paul, Weiss, Rifkind, Wharton & Garrison LLP and financial adviser Houlihan Lokey Howard & Zukin Capital Inc.
Houlihan Lokey will take the lead in trying to win support for the new bondholder proposal, the person with direct knowledge of the process said.
GM shares were up 4 cents, or 3.5 percent, at $1.19 on the New York Stock Exchange, after rising as much as 23 percent earlier in the day. Current shares are expected wiped out in the GM reorganization.
GM's 8.375 percent bonds due in 2033 rose to 9 cents on the dollar from 7.1 cents before the new offer, according to MarketAxess.
(Reporting by Kevin Krolicki, David Bailey, Soyoung Kim, Poornima Gupta, Nick Carey, Dena Aubin, Walden Siew and Phil Wahba, editing by Gerald E. McCormick and Matthew Lewis.)