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GM Bondholders Holding Firm as Automaker Deadline Approaches

by Christopher Smith
March 23, 2009

bondholders -- who combined hold $27 billion dollars in GM debt -- have come under increasing fire from Washington this past week to accept a two-thirds reduction of that debt in exchange for additional equity in the company. Representatives for the bondholders argue that they're being asked to make much larger sacrifices than other involved parties, and that neither GM nor the federal auto task force have attempted to work with a plan bondholders submitted to Washington on March 5.

In an open letter sent today to the U.S. Treasury as well as the auto task force, advisers for the bondholders made a direct appeal for additional discussion or consideration of the plan they submitted, saying that bondholders had no voice in the original plan issued by the government late last year.

"It appears a purely arbitrary decision was made in December as to what bondholders would receive," said the letter. "All other parties involved in the restructuring process will walk away with far more. Many will be paid in full. It is unclear why it was decided that GM's bondholders should bear the greatest risk here. Consequently, it is not surprising that others may be ready to accept a deal that severely disadvantages bondholders who had no role in crafting it."

Some of the "others" include the UAW, which has also been a sticking point for GM regarding retiree health care benefits. Bondholders argue that additional concessions should be made by the union, over and above those already outlined in the government's terms for restructure. UAW officials have responded by saying they've "already stepped up" to help in the restructuring efforts.

In the letter, bondholders also express a lack of confidence that GM's restructuring plan will actually be successful, thus rendering the "debt for stake" trade virtually worthless.

"While this plan is a step in the right direction, we are concerned that the company is putting too much faith in a near-term turnaround in the economy that would enable annual car and truck sales to reach previous levels. We do not know if the plan would, in fact, keep the company out of bankruptcy."

In the waning days of the March 31 deadline for GM and , the government has consulted with several bankruptcy firms, fueling concerns that a bankruptcy may be looming. Matthew Feldman, a bankruptcy attorney from New York, was recently hired to serve as an adviser for Treasury Secretary Geithner and National Economic Council Director Lawrence Summers on bankruptcy reorganization efforts.

Meanwhile, bondholders have submitted a plan they say is "consistent with the government's restructuring objectives under the terms of the bridge loan," and "provides the best chance... of completing an out-of-court restructuring by securing a high level of acceptance among a diverse group of GM bondholders." Though the details of that plan haven't been released, it's thought to include a government-backed guarantee of GM debt in the event of a bankruptcy filing.

Auto task force member and lead adviser Steven Rattner has been increasingly critical of bondholders, whom he believes are being "extremely difficult" with regard to the negotiations. In an interview with Bloomberg television last Friday, Rattner suggested that a deadline for debt-restructuring talks may be set to help force the issue.

"The government cannot solve everybody's problem, and we need for the bondholders to become part of this in a constructive way," he said.

"Keeping lines of communications open is the only way we all can meet the March 31 deadline for a debt-to-equity exchange," said the bondholder statement. "We are disappointed that we have had no response to our proposal from either GM or the auto task force. We are ready and willing to engage in active negotiations with all parties and work around the clock to reach a solution that is best for GM, its workers and taxpayers."


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