GM bondholders glimpse carrot behind the stick

DETROIT Sat May 30, 2009 8:49am EDT

A worker drives a car past the parking lot of a General Motors factory in Shanghai May 29, 2009. REUTERS/Stringer

A worker drives a car past the parking lot of a General Motors factory in Shanghai May 29, 2009.

Credit: Reuters/Stringer

DETROIT (Reuters) - In a sudden turnaround of sentiment, General Motors Corp bondholders are focusing more on what they have to gain from the automaker's restructuring than what they stand to lose.

That marks a sharp change in tone from months of complaints that the Obama administration was bullying creditors in GM's bankruptcy-in-the-making because it favored the automaker's unionized workers.

Advisers to a group of GM institutional bond investors on Friday issued an appeal to other bondholders to join in supporting terms of a deal that could give them 25 percent of a post-bankruptcy company in exchange for $27 billion in debt.

The appeal is straightforward: if GM is pushed through a fast-dash bankruptcy that slashes debt and costs, it only has to emerge as almost as valuable as its smaller rival Ford Motor Co for bondholders to start making money.

Ahead of a Saturday deadline, more GM bondholders were ready to support the deal with expectations growing that it could win over a majority share of the bond debt.

Elliott Management, a $13-billion hedge fund and a significant GM bond position, will vote for the new deal.

"Based on all the facts and circumstances Elliott Management has chosen to support the current GM proposal to bondholders," the fund said in a statement when contacted.

Elliott also served on the committee of Chrysler's secured creditors and had supported a government-brokered plan for that restructuring before Chrysler was put into bankruptcy.

Bill Zastrow, an individual investor with $240,000 in GM bonds, said he also supported the deal after opposing an earlier offer.

"We were getting the Marie Antoinette haircut and now it looks like it's a few inches higher," he said.

IMPROVED TERMS

The new offer to GM's bondholders has several improvements over a debt-for-equity exchange that collapsed with a whimper earlier this week. It is provisional on winning enough support from the thousands of varied bondholders.

First, the $27 billion in GM's bond debt would be transferred to the "old GM" -- the bucket of closing plants, stranded equipment and other assets that would be left behind in Chapter 11, while the new GM emerges from court protection.

The assets of the old GM would be sold off for whatever the distressed auto market could bear and given to bondholders and other creditors. That could represent a bonus in the waiting for creditors who only learned details of that part of the plan on Friday.

"That was a surprise," said Pete Hastings, a bond analyst at Morgan Keegan. "I've talked to a lot of institutional investors today who are more positive about this."

In addition, GM bondholders are protected from having their equity stake in the new GM diluted.

The plan hammered out with the Obama administration's autos task force sets aside "2 percent of additional new GM common stock (for bondholders)," Andrew Rosenberg, legal adviser to the bondholders, said on Friday.

Bondholders would start with a 10-percent equity stake in the new GM.

But significantly, their warrants would allow them to take another 15-percent early in any recovery for GM, which remains the top-selling automaker in the world's largest auto market.

HOW HIGH CAN IT GO?

If GM bounces back out of bankruptcy to be valued at $15 billion, bondholders would be paid out at 10 cents on the dollar. By comparison, Ford is now worth almost $18 billion -- without the benefit of a purge of its debt in bankruptcy.

GM's 8.375-percent bonds due in 2033 last traded at 9.5 cents on the dollar on Friday, according to MarketAxess.

From there, it only gets better depending on how bullish an assumption creditors are willing to consider.

Bondholders get 28 cents on the dollar if GM staggers back to a $30-billion valuation -- near where the automaker stood in 2004 before it spun out of control with $88 billion of cumulative losses.

If you assumed GM could one day be as valuable as Honda Motor Co -- why not dream? -- bondholders would get 48 cents on the dollar.

By contrast, if bondholders had taken the earlier offer they only would have recovered 19 cents in that scenario.

The Treasury has said it could pull its sweetened offer if not enough bondholders sign on in support by Saturday afternoon.

The higher payout for bondholders is possible because the U.S. taxpayer could be waiting a very long time for a full return. For the U.S. government to be paid off in full, GM would have to be worth $69 billion.

For the United Auto Workers to get its equity-based bonus to kick in, GM would have to be worth a staggering $75 billion -- roughly $125 per share in terms of the old company.

The union concedes that will be a stretch: it means accepting the pipe dream that a new GM scrubbed of debt with screaming-hot products and happy and productive workers could be worth just over half as much as Toyota Motor Corp.

"That's over there in the corner over there," UAW President Ron Gettelfinger told reporters when asked about the union's equity warrant. "We're basing everything else on reality."

(Reporting by Kevin Krolicki and Walden Siew; editing by Carol Bishopric)

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