AP Auto Writers
DETROIT (AP) — A General Motors Corp. bankruptcy filing seemed inevitable after a rebellion by its bondholders forced it to withdraw on Wednesday a plan to swap bond debt for company stock.
GM has until Monday to complete a government-ordered restructuring that includes debt reduction, labor cost cuts and plant closures. But a bankruptcy reorganization is likely after the company said its offer to exchange $27 billion in unsecured debt for 10 percent of the company's stock had failed. GM has received $19.4 billion in federal loans.
GM shares lost 16 cents, or 11.1 percent, at $1.28 in premarket trading.
John Pottow, a professor at the University of Michigan who specializes in bankruptcy, said GM evading bankruptcy now is almost impossible.
"They said no. That's it. They tried. That's why they're going to have to file for bankruptcy," Pottow said.
GM spokesman Tom Wilkinson said the board will meet later this week to decide its next move, but he would not say exactly when. He also would not say if the company would soon file for bankruptcy protection, nor would he reveal what percentage of bondholders took the offer.
In a statement issued Wednesday, the company said: "The principal amount of notes tendered was substantially less than the amount required by GM to satisfy the debt reduction requirement under its loan agreements with the U.S. Department of the Treasury."
The Obama administration has said it would only provide more funds if 90 percent of the bondholders, as well as unionized workers, agreed to concessions that substantially reduced GM's costs.
GM also said it canceled meetings set for Wednesday with holders of notes that were not sold in U.S. dollars. The statement said the meetings were to discuss amendments to the debt-for-equity offers, but it did not specify what the amendments were.
There was a small hope Tuesday that GM could avoid a bankruptcy filing when the United Auto Workers union disclosed that it would take a 20 percent stake in GM — down from the original plan of 39 percent. That seemingly freed 19 percent of the Detroit-based company's shares to sweeten the pot for its recalcitrant bondholders.
But because the bondholder deal did not go through, the equity freed by the UAW deal now apparently will go to the U.S. government, which may have to commit billions more for GM's restructuring in court.
The government's stake in the company originally was to be 50 percent, according to GM's regulatory filings. But it now could be as high as 69 percent. The Canadian government also could get equity for up to $8 billion in aid for the automaker.
Such an arrangement would leave bondholders back where they started — and a Chapter 11 filing all but certain. The deadline for GM's bondholders to tender their debt was midnight Tuesday.
Meanwhile, crosstown rival Chrysler LLC heads to court Wednesday to ask a bankruptcy judge for permission to sell the bulk of its assets to a group headed by Italy's Fiat Group SpA in hopes of saving itself from liquidation.
Attorneys for Chrysler maintain that the Fiat deal is the company's only hope to avoid being sold piece by piece, but car dealers, bondholders, former employees and others are protesting what they see as the government speeding Chrysler through the bankruptcy process without regard for certain creditors.
Chrysler filed for bankruptcy protection April 30, after the government ended talks with a group of holdout bondholders.
Automakers worldwide are struggling as the global recession has reduced demand for new vehicles. But GM and Chrysler have been particularly hobbled by promises to cover the health and pension costs of tens of thousands of unionized retirees — along with recent record-high gasoline prices that reduced demand for their low-mileage trucks and SUVs.
When GM announced its debt exchange last month, the company offered bondholders 225 shares of common stock for every $1,000 in debt — or a 10 percent stake in the restructured company. In addition to the UAW's share, the federal government was to take 50 percent for exchanging a combined $20 billion of their debt to equity. Current stockholders would end up owning just 1 percent of the company.
A committee representing GM's biggest bondholders — mostly big banks and other institutional investors — has opposed the debt-for-equity swap from the start.
Smaller, "retail" bondholders — individual investors like retirees and families — have also railed against the terms of the exchange. Both groups say the offer gives them too small a stake for the amount they are owed.
GM had said previously that the government was preventing it from offering bondholders more than 10 percent of the restructured company.
Some analysts said GM's bondholders may be holding out for better terms in bankruptcy. Stephen Lubben, a law professor at Seton Hall University, said unsecured creditors like bondholders often recover 40 percent of their investment in bankruptcy.
"They may not do much better, but they can't do any worse," he said.
Another factor complicating the decision of GM's bondholders: Many large investors hold insurance policies on their bonds known as credit default swaps. Such policies would reimburse bondholders in the event of a "credit event" like a bankruptcy filing.
Investors who hold credit default swaps on GM debt stand to make about $2.33 billion if the insurance contracts are triggered, according to the Depository Trust & Clearing Corp.
Copyright 2009 The Associated Press.