GM bankruptcy nears as bondholders shun tender offer

By Kevin Krolicki and Jui Chakravorty Das

DETROIT/NEW YORK (Reuters) - General Motors Corp has failed to persuade enough bondholders to accept a debt-for-equity swap, setting the stage for the largest-ever U.S. industrial bankruptcy within days.

The event marks a critical disappointment for GM, the largest U.S. automaker and once considered the bellwether of U.S. manufacturing.

"I would say this is a sound rejection of an unsuitable offer," said Pete Hastings, a credit analyst at Morgan Keegan who has followed GM. "I have been saying for some time that this thing was dead on arrival and we were just waiting for the doctor to pronounce it dead. Now that's happened."

The largest U.S. automaker had so far failed to gain anywhere near the 90 percent of bondholder support desired to stave off bankruptcy, two sources familiar with the discussions told Reuters on Tuesday. Bondholders have until midnight to make their final decision on the tender.

As of midday Tuesday, the source said the company had only a "low-single-digit" percentage interest from bondholders.

But bondholders have balked at proposals that they forgive debt in exchange for a 10 percent stake in a restructured company.

GM had no comment on the bond exchange. The automaker said it would detail results of the exchange on Wednesday morning. Reuters sources said GM could file for bankruptcy some time after midnight Tuesday, but before June 1.

THE WAITING GAME

While the failure to reach a bondholder deal is a severe blow, GM did reach an agreement on Tuesday with the leadership of the United Auto Workers (UAW) union.

The key for GM's negotiations with the UAW has been how the two sides restructured payment terms on $20 billion that the automaker still owes to a trust fund for retiree health care (the Voluntary Employee Beneficiary Association, or VEBA).

The UAW agreed to take 17.5 percent of common stock in a restructured GM, a person familiar with the terms told Reuters.

The union would also be paid $6.5 billion in preferred stock and would be granted a $2.5 billion note.

A deal on those terms would mean that the union was successful in taking on less risk than it would have under an earlier proposal from GM that would have given it 39 percent of the automaker's common stock.

As part of the plan, GM will offer buyouts to all UAW employees. Workers with 20 years or more will be offered $115,000 and a $25,000 voucher toward purchase of a new GM vehicle.

The UAW did not sugar-coat its view of GM's current condition.