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GM Will File for Bankruptcy on Monday As Bondholders Agree to Sweetened Plan

By , Contributing Writer, Money Morning •

By Don Miller
Associate Editor
Money Morning

General Motors Corp. (NYSE: GM) plans to file for bankruptcy protection on Monday, June 1, and sell most of its assets to a new company formed by the U.S. government, Bloomberg News reported, citing people familiar with the matter.

The American cultural icon, with roots that go back to the horse-and-buggy era, will sell its assets to a company that will be temporarily funded by the government until it exits the Chapter 11 bankruptcy process.

Based on GM's reported global assets of $91 billion and total liabilities of $176.4 billion as of Dec. 31, GM's bankruptcy will be the third-largest in U.S. history, according to Bloomberg, trailing only Lehman Brothers Holdings Inc. and WorldCom Inc.

The company plans to rebuild itself around its most successful operations, including the Chevrolet and Cadillac brands, and would exit bankruptcy in sound financial health within months if the plan succeeds. Other assets, such as laggard brands Pontiac, Hummer and Saturn, and other liabilities would be divested in a lengthier court-supervised reorganization.

GM was staring down a June 1 deadline to come up with a viable restructuring plan or face a government-imposed bankruptcy. The automaker failed to wring $44 billion in concessions from its bondholders and the United Auto Workers (UAW) union to prove its reorganization plan could work, as the government demanded.

The company accelerated its lurch towards bankruptcy yesterday (Thursday) when its main bondholders reversed ground and accepted a sweetened, take-it-or-leave-it offer to give them a bigger stake in the new company.

The bondholders agreed to the new deal after GM revised the offer to give creditors the option to buy an additional 15% stake in the new GM at a low price.  The offer is contingent on the debt holders conceding they will not fight the bankruptcy plan being jointly devised by the Treasury and company officials.

"The Ad Hoc Committee of GM bondholders supports the revised offer from GM and believes...that it represents the best alternative for bondholders in the current difficult and dire situation," the committee said in a statement, according to Reuters.

"Rejecting this offer in the expectation that the bondholders will do better in a litigated outcome was a risk the Committee is unwilling to take," the statement said.
The committee consists of major institutional creditors holding around 20% of GM's debt.  The remaining bondholders will have until late Saturday to indicate they are willing to accept the new offer or GM can reduce the offer or take it off the table altogether.

The new plan, revealed in a Securities and Exchange Commission filing yesterday, also provides that $40 billion of federal aid pledged to GM will be converted into a 72.5% stake in the new company.

That means that after the bankruptcy process is completed, shares of the new GM will have to increase dramatically for taxpayers to make back any of the money they loaned to GM, according to CNNMoney.

Opel Talks Take a Bizarre Turn

The evolving bankruptcy saga also took a tumultuous turn in Europe as GM stunned German government officials by demanding at least $415 million (300 million euros) more in cash for its Opel unit.

The dispute between Germany and the U.S. government threatened to sink plans to rescue GM's Opel unit out from under GM's imminent bankruptcy, putting the jobs of 25,000 German workers at risk.

Germany wanted to reach an agreement with U.S. and GM officials to place Opel in a trust that would receive $2.25 billion (1.5 billion euros) in government financing. But the Germans balked when told GM would need the additional financing to keep the unit running through the third quarter.

"This was a bizarre night," German Economy Minister Karl-Theodor zu Guttenberg told reporters at 4:30 a.m. "The talks were turned upside down by GM's unexpected demands. We do not have the assurances we need in order to extend a bridge loan."

"We had a nasty surprise when this demand turned up literally at 8 p.m.," an hour before the talks started last night, Finance Minister Peer Steinbrueck told Bloomberg. "We did consider this a bit of an outrage."

But the Germans' claim that extra funding was needed was simply a misunderstanding, according to GM's Chief Executive Officer, Fritz Henderson.

GM's request for a $2.1 billion (1.5 billion-euro) so-called bridging loan remains unchanged, Henderson said in an interview with Bloomberg News. Instead, the carmaker now needs 450 million euros upfront, but the German government had understood the company would only need an immediate 100 million euros, he said.

"Any confusion that was caused by this we take responsibility for," Henderson said. "We're trying to find common ground in Europe in what is clearly a tense situation."

Negotiations were set to resume Thursday at 4 p.m. in Berlin.

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