DETROIT General Motors Corp is battling to survive collapsing auto demand, tight credit and uncertain prospects for recovery in its biggest markets.
But its most-pressing crisis is simpler: too much debt.
As GM begins a second round of make-or-break concession talks with creditors and its major union, analysts and bondholders are raising concern its restructuring plan does not go far enough to scour its balance sheet.
The risk is that even if GM wins the high-stakes deals it needs to eliminate some $28 billion in debt by issuing new shares, it could end up wiping out those gains by borrowing even more from the U.S. government.
Bondholders worry that would leave the automaker vulnerable to a second and even-more wrenching restructuring -- only this time they would be the equity owners of the ailing company.
"Everybody is going to have to give at the office to make this work," said a person with direct knowledge of GM's talks with bondholders. "But this would leave bondholders behind a monstrous debt claim."
Analysts warn that the risk of bankruptcy remains large.
A day after GM submitted its restructuring plan to U.S. officials, ratings agency Moody's Investors Service put the risk that GM or Chrysler LLC, or both, are forced into bankruptcy at 70 percent, unchanged from its view in December.
The issue of GM's debt load as it fights to restructure outside bankruptcy will be central to a high-pressure round of negotiations between GM and its bondholders now set to begin.
GM bondholders, led by a committee of big investors, are being asked to cut the $27 billion they are owed by two-thirds in exchange for shares in a recapitalized automaker.
The other $18 billion in bond debt would disappear from GM's balance sheet.
That equity-swap could give bondholders a stake of some 65 percent of the new GM that the automaker hopes will emerge from its "Renaissance" plan, according to an early estimate from Credit Suisse analyst Chris Ceraso.
The talks will have to be wrapped up around the third week of March to launch the equity exchange by March 31 as mandated by GM's bailout, the person close to the talks said.
That leaves GM with about five weeks to conclude negotiations on three fronts: It needs deals with bondholders and its union on debt concessions and an agreement with the government's auto restructuring panel headed by Treasury Secretary Timothy Geithner on funding.
Failure on any front risks bankruptcy.
"Is it likely to happen outside of a bankruptcy setting? In my view it's not," said Douglas Bernstein, managing partner at Plunkett Cooney who is not engaged by the Detroit automakers.
He added: "It turns into a game of chicken."
The United Auto Workers union is owed some $20 billion by GM to fund a trust for retiree healthcare and faces pressure to take $10 billion of that amount in stock in a new GM. Those talks also have to be concluded by the end of March.
Bondholders and the union have been widely seen as competing for a share of the same shrinking pie at GM.
Bondholders are not demanding an equal payout with the union fund, but want to see their investments protected by the terms of the swap, the person close to the talks said.
GM bondholders could also support efforts by the government to take over some of the healthcare and other retirement liabilities owed to the union, the person said.
GM President Fritz Henderson also suggested the automaker may need support for its pension to keep debt levels down.
"The level of leverage is not something we're satisfied with," Henderson told analysts. "We need to look at pensions. We need to look at alternatives."
GM has already received $13.4 billion from the U.S. government and asked to raise that to up to $30 billion in aid in a plan submitted on Tuesday to the U.S. Treasury.
In a step aimed at keeping its debt from spiraling back out of control, GM has suggested that up to $16.5 billion of its U.S. government aid could come in preferred equity.
But the total amount of support from the U.S. government could rise to as much as $50 billion, including other loans from the U.S. Department of Energy, GM said.
Add another $13 billion in potential borrowing from foreign governments and others and GM's debt could rise to almost $75 billion five years out, according to its own projections.
That would mark a 50 percent increase from the struggling automaker's debt balance in 2009.
GM Chief Financial Officer Ray Young warned that could prompt another round of cost-cuts and debt reduction.
"This frankly is not sustainable," Young told analysts. "If we were into this particular scenario, there would be a major operating restructuring and frankly a major balance sheet restructuring beyond what we've talked about thus far."
(Reporting by Kevin Krolicki; Additional reporting by David Bailey in Detroit; Editing by Gary Hill)