March 23 (Bloomberg) -- Bondholder representatives said General Motors Corp.’s formula to swap debt for equity is likely to lead to “a bankruptcy that would have dire consequences,” and the advisers urged agreement on an alternative.

“We believe that, unless the framework we suggested is utilized, the restructuring currently contemplated will not achieve the required level of acceptance to succeed on an out- of-court basis,” the advisers wrote in a letter yesterday to Treasury Secretary Timothy Geithner and representatives of President Barack Obama’s auto task force.

The advisers said they are “disappointed” proposals they offered March 5, which the letter doesn’t describe, received no response from the task force or GM. The automaker is trying to persuade bondholders to swap debt valued at $27.5 billion for $9.2 billion and equity in the automaker.

Bondholder advisers are balking at those conditions, which GM and the federal government agreed to in December when the Treasury gave the largest U.S. automaker $13.4 billion in loans to prevent a bankruptcy. GM is under pressure to show progress in meeting the terms by March 31, or Obama’s auto task force may recommend that the automaker be tipped into bankruptcy.

“We aren’t commenting on the letter or specifics of the negotiations except to say that GM remains in discussions with advisers to the ad hoc bondholder committee in efforts to reach an agreement on the bond exchange,” Renee Rashid-Merem, a GM spokeswoman, said yesterday.

Franklin, Fidelity

GM’s 8.375 percent bonds due 2033 have risen almost 3 cents this month to about 19 cents on the dollar at 11:12 a.m. New York time. The notes traded at about 72 cents a year earlier, according to Trace, the bond-price reporting service of the Financial Industry Regulatory Authority.

The biggest holders of GM debt are San Mateo, California- based Franklin Resources Inc., Fidelity Investments in Boston and Los Angeles-based Capital Research & Management Co., Bloomberg data based on regulatory filings in December show.

Bondholder representatives met with Obama’s task force March 5 to discuss steps the government can take, including a federal guarantee of new debt, a person familiar with the matter said that day. The representatives haven’t released details of the so-called framework presented to the task force.

‘Number of Benchmarks’

“The existing loan agreement with General Motors includes a number of benchmarks -- including with respect to unsecured debt -- that were to be achieved by March 31,” Treasury spokesman Isaac Baker said in an e-mailed statement yesterday. “We expect all stakeholders to continue their efforts. As we approach March 31, the Auto Task Force will evaluate the progress made in achieving these objectives and will put forward a concrete plan for next steps.”

The Treasury’s chief auto adviser, Steven Rattner, said in an interview March 20 that GM bondholders “are looking to the government to help them solve their problem.”

Rattner added that “the government cannot solve everybody’s problems, and we need for the bondholders to become part of this in a constructive way.” He said he may set a deadline for parties including the bondholders and the United Auto Workers to reach a deal.

‘Deeper Cuts’

Bondholders “have been asked to make deeper cuts than other stakeholders,” according to yesterday’s letter from Eric Siegert of the investment firm Houlihan Lokey Howard & Zukin Capital, which is advising the ad hoc committee of bondholders. All other parties “will walk away with far more.”

The plan currently being followed “will not achieve the required level of acceptance,” probably resulting in bankruptcy, the bondholder advisers’ letter said.

The letter was addressed to Rattner; Geithner and National Economic Council Director Lawrence Summers, who are co-leaders of Obama’s auto task force; and Ron Bloom, a senior auto adviser at Treasury.

The United Auto Workers, in a March 16 letter to Congress, criticized efforts by bondholders to get more concessions, arguing that union retirees, surviving spouses and dependents have already reduced GM’s post-employment health-care liability by more than 40 percent since 2005.

“Unfortunately, bondholders and other lenders are still resisting the restructuring targets set forth in the Treasury loan agreements,” said the letter from Alan Reuther, the UAW’s legislative director.

President George W. Bush’s administration on Dec. 19 agreed to the GM loan as long as the company can meet targets such as cutting their bondholder debt by two-thirds in an equity exchange. GM on Feb. 17 requested as much as $16.6 billion in additional aid.

GM rose 7 cents, or 2 percent, to $3.25 at 11:59 a.m. in New York Stock Exchange composite trading. The stock has fallen 84 percent over the past year through March 20.

To contact the reporter on this story: John Hughes in Washington at jhughes5@bloomberg.net

Last Updated: March 23, 2009 13:18 EDT