The proverbial monkey on the back of General Motors Company (NYSE:GM) is about to become smaller as the automaker announced it would be buying billions of dollars worth of high-interest preferred stock back from a voluntary employees' beneficiary association, known as a VEBA, run by the United Auto Workers (UAW) and funding the purchase with lower-cost financing.

The deal means GM will incur an $800 million special item in the company’s third quarter to buy the 120 million shares at $27 apiece, but the cost is lower than continuing to pay dividends on the preferred stock.

The move is part of GM’s efforts to put the 2009 Chapter 11 reorganization behind it. It was GM’s bankruptcy that sent GM shares to the U.S. Treasury, the UAW trust and the Canadian government – all of whom are seeking to exit from being GM shareholders.

“General Motors Co. announced today it has reached an agreement to repurchase 120 million shares of its Series A Preferred Stock from the UAW Retiree Medical Benefits Trust (UAW VEBA) for a total cash consideration of approximately $3.2 billion or $27 per share,” the Detroit-based company said in a filing on Monday with the Securities and Exchange Commission.

The deal is contingent on a bond offer for five, 10- and 30-year maturities and would reduce the UAW’s VEBA holding of GM stock to 140 million shares from 260 million shares. GM pays more than $600 million a year in interest on preferred shares, so reducing that exposure lowers some of that expense.

Meanwhile, the company has attained entry-level investment grade status after Moody’s Investors Service ungraded GM credit to Baa3 with a stable outlook. GM lost Moody’s investment grade status in 2005, three years before the auto industry crisis, due to its growing debt and shrinking market share.

GM was viewed at the time as cranking out too many large gas guzzlers even as more consumers were gravitating toward smaller vehicles, such as crossover SUVs. The upgrade means GM’s borrowing costs will go down. The other two major ratings agencies, Fitch and Standard & Poors, still rate GM credit as junk. The company has about $26 billion in cash and $60 billion in short term liabilities as of the end of June.

Moody’s rated GM’s bond offering at junk status because a GM holding company is selling the debt, which exposes GM to being forced to pay creditors first if the company runs into future financial troubles.