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GM bondholders see raw deal in latest exchange offer

April 27, 2009 | 12:30 pm

General Motors Corp.'s latest debt-for-equity swap proposal is barely out of the box, and some critics already have declared it a non-starter.

GM wants bondholders to exchange their $27 billion in debt for a 10% equity stake in a restructured company. They’d get 225 shares for each $1,000 face value of debt.

By contrast, the United Auto Workers’ retiree-medical fund, the Voluntary Employee Beneficiary Assn., would get up to a 39% stake in the new GM in exchange for forgiveness of at least half of GM’s obligations to the fund.

Some analysts say bondholders can’t help but see the terms as a raw deal for them. [UPDATE: See the official statement from the bondsholders' ad hoc committee here.]

In a report today, Barclays Capital analyst Brian Johnson estimated that bondholders ultimately would get between 0 and 5 cents on the dollar if they accept the latest offer (after accounting for stock dilution from the issuance of new shares). The UAW, he estimated, would get between 50 and 60 cents on the dollar.

From Bloomberg News:

"This is an offer that’s designed to fail," said Kip Penniman, an analyst at bond research firm KDP Investment Advisors. "To get 90% of them to agree to such a deal where there’s no cash, no other debt and pure equity while leaving the union VEBA arrangement unchanged from previous considerations is absurd."

The offer is "extremely unattractive," said Mirko Micelic, an investment manager at Fifth Third Asset Management in Grand Rapids, Mich. "I’d be surprised if many take this offer. I don’t think bondholders are interested in a 10% equity stake. They want control."

The bondholder committee, whose members include Franklin Resources and Loomis Sayles & Co., hasn’t yet come up with a formal response and expects to try to negotiate a better offer, said a person familiar with the committee.

If the offer fails, and GM files for bankruptcy protection, creditors then would be rolling the dice for a better settlement in court. The problem there is that the federal government, which would get a majority stake in GM under the proposed restructuring, would be the elephant in the courtroom.

For bondholders, "You have this gun being put to your head saying that if you don’t take this, we have something that’s even worse for you," meaning bankruptcy, Shelly Lombard, an analyst at research firm Gimme Credit, told Bloomberg.

"I just don’t think they have the negotiating leverage to get anything better than what’s currently on the table," she said.

-- Tom Petruno

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