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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.
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.
The UAW did not sugar-coat its view of GM's current condition.
"GM today stands at the very brink of bankruptcy," the union said in a document distributed to GM workers that detailed the concessions it had agreed to make.
The UAW rank and file will vote on the contract on Wednesday and Thursday. Union officials who met in Detroit on Tuesday unanimously endorsed the pact after a briefing with UAW President Ron Gettelfinger, a person at the meeting said.
Current shareholders would be left with just 1 percent of a restructured company.
"It's a slap in the face," said James Yarbrough, a retired accountant from Plano, Texas, referring to the 10 percent equity stake offer.
Yarbrough has invested $158,000 in GM bonds, which he first bought in 1994. He regrets buying more bonds in 2008, when he thought GM was about to make a turnaround.
A person familiar with Obama administration's thinking on the matter said the White House was continuing to engage with bondholders to reach agreement.
GM shares, which could be worthless in a bankruptcy, ended Tuesday trade up 1 cent at $1.44 on the New York Stock Exchange after trading between $1.12 and $1.84 on the day.
The U.S. government has provided a combined $36.6 billion to GM, Chrysler and their financing units since December. Other sources said the government would provide "adequate working capital" to GM during bankruptcy and would want to be as inactive as possible as a shareholder.
The sources did not detail figures but the Wall Street Journal reported the Treasury plans to inject $50 billion in various financings to back a GM workout, most of which would take the form of company equity. The Journal also said the government would increase its stake to 70 percent from 50 percent, to reduce GM's debt once it emerges from bankruptcy.
The sources said any GM bankruptcy would be more time-consuming than Chrysler's because of the complexity of GM's global network. But the government would like to get out of an ownership stake once it was certain that taxpayers' interests were protected in a going concern.
The government is also providing billions to Chrysler in bankruptcy and hoping to be a short-term investor.
Chrysler is seeking approval this week to sell itself to a "New Chrysler" owned by the U.S. and Canadian governments, Chrysler's union and Italian carmaker Fiat SpA. A hearing on the sale will take place on Wednesday.
On Tuesday, a U.S. federal judge denied a request by a group of Indiana pension funds to delay the company's sale hearing and remove the bankruptcy case to district court.
Chrysler's bankruptcy and the looming insolvency of GM has further rattled the industry's supplier base. U.S. auto suppliers will be in dire need of up to $8 billion in emergency government aid over the next few months particularly if GM enters bankruptcy, Michigan Gov. Jennifer Granholm said in Detroit.
While much attention is on Washington and Detroit, talks continue in Europe over the possible sale of GM's Opel unit.
On Tuesday, Germany pressed three bidders for Opel to improve their offers for the carmaker, saying they needed to assume greater risks and make credible commitments to preserve jobs and sites.
Economy Minister Karl-Theodor zu Guttenberg told reporters after meeting Fiat Chief Executive Sergio Marchionne in Berlin that the Italian carmaker's offer looked serious but that rival bidders Magna and RHJ International remained in contention.
"There's no favorite," he said. "Everyone knows that improvements are still necessary."
In an unexpected twist, China's Beijing Automotive Industry Corp (BAIC) also submitted an offer, potentially turning the three-way race into a four-way battle. that would also include U.S. carmaker Chrysler.
Reporting by Jui Chakravorty and Kevin Krolicki; additional reporting by John Crawley, Walden Siew, Andreas Moeser, Noah Barkin, David Lawder, Emily Chasan and Nick Carey; editing by Patrick Fitzgibbons, Matthew Lewis, Gary Hill