April 14, 2009 at 12:27 pm

U.S. may swap GM debt for equity

Possible move would improve automaker's shaky balance sheet

The federal government may agree to swap some of its $13.4 billion in General Motors Corp. debt for new equity in the company in a move to help boost GM's balance sheet, a person familiar with the matter said Monday.

The government is in discussions with GM as the automaker tries to accelerate its restructuring ahead of a June 1 deadline to wrest concessions from bondholders and the United Auto Workers or face bankruptcy.

In January, GM granted the Treasury Department warrants for 122 million shares, 19.99 percent of the automaker's outstanding common stock, with an exercise price of $3.57. It's not clear how the warrants would be affected in bankruptcy court.

GM bonds fell to their lowest level ever Monday, and its stock continued a prolonged decline amid renewed bankruptcy fears.

The double dip came three days after GM's debt was downgraded by Standard & Poor's, a credit rating agency, and hours after a top Wall Street analyst warned the risk of bankruptcy had increased.

GM's corporate bonds, a type of debt issued by the automaker to raise money and sold to investors, were trading at 9.4 cents on the dollar Monday, while its stock fell sharply, down 33 cents, or 16.2 percent, to close at $1.71 a share. In the last year, GM's stock has lost 93 percent of its value.

One big factor pressuring the automaker is its $13.4 billion in loans from the U.S. government, which may have to be restructured along with $28 billion in debt held by GM's bondholders and $20 billion in obligations to the United Auto Workers.

Restructuring the loans would mean the government would have to accept less money or take a junior position to other creditors.

"If the government has now truly realized that it will eventually have to 'restructure' its own loans to GM (similar to Citi or AIG), a bankruptcy may be much more politically necessary (i.e. judge-imposed changes to the government's claims would be politically less painful)," wrote Himanshu Patel, an auto analyst for JPMorgan, in a report Monday.

GM has been planning for weeks for a possible bankruptcy filing if it can't meet the June 1 deadline set by the Obama administration's auto task force, members of which are operating out of GM's headquarters in the Renaissance Center.

GM President and CEO Fritz Henderson said last week the carmaker is planning for bankruptcy if necessary but prefers to win needed concessions outside bankruptcy court. Earlier this month, Henderson conceded bankruptcy is "more probable."

"If it can't be done outside of a bankruptcy process, it will be done within it," Henderson said.

One big issue is how much GM creditors and bondholders could delay the company's exit from a quick bankruptcy that could be structured under Section 363 of the Chapter 11 bankruptcy code. That allows for an asset sale that would let the government split off GM's healthy parts from the rest of the company.

One scenario under consideration would divide the Detroit automaker into a "good" company and a "bad" company, allowing the more viable parts of the automaker -- assets like Chevrolet, Buick and Cadillac -- to emerge from bankruptcy within a month.

Certain assets and liabilities, such as retiree health care and nearly $28 billion in bond debt, could stay in bankruptcy for an extended period and be liquidated or haggled over by creditors.

GM plans to unveil a harsher offer to bondholders this week than it proposed last month. The new offer could be as little as 20 percent of GM's equity, versus the previous offer of 8 cents on the dollar, 16 cents of new debt and up to 90 percent of GM's equity.

"This development makes us think that a bankruptcy is more likely," Patel wrote of the new harsher offer.

Patel said he is expecting stricter terms for the UAW as well. GM had reportedly proposed last month that the UAW accept $10 billion in preferred stock with a 9 percent interest rate and $10 billion in cash over 20 years as part of payments into a union-run retiree health care trust.

dshepardson@detnews.com">dshepardson@detnews.com (202) 662-8735