GM's bondholders say they want to deal

General Motors is inching toward a few deals that it needs to restructure the company and stay out of bankruptcy. A committee representing its bondholders said on Monday night that it has submitted to GM management and President Obama’s Auto Task Force a framework for reducing the company’s $27.5 billion in bond debt. The committee didn’t give exact figures. But a source close to the committee said that its members basically agreed in principle to cut it by roughly two-thirds, which is the amount that the Bush Administration asked for last year before extending more credit to GM or Chrysler. Bondholders would get roughly one-third of the value of their bond in cash and the rest in GM stock.

But there’s a catch. Several, it seems. The bondholders want the United Auto Workers to reduce labor costs and accept equity for at least half of the $20 billion GM owes the union for healthcare liabilities. They want management to take a tougher look at the company’s restructuring plan. The bondholders have also asked the government to guarantee the cash portion of GM’s debt.

There’s another big catch. The bondholders committee represents about $6 billion worth of bonds directly and is in frequent contact with creditors holding about $6 billion more in debt. So the most the bondholders committee can do is make a call for $12 billion of the $27.5 billion in bonds. GM and the Task Force still must convince the remaining bondholders to take the swap.

That could be a big problem. GM needs about 90% of the bondholders to accept a cram down to fix its balance sheet. Otherwise, bankruptcy is still an option. In bankruptcy court, they only need two-thirds to agree to a cram down and the court will make the deal firm. No wonder Steve Rattner, the Wall Street banker who heads up the task Force, told the Detroit Free Press that the bondholders are being difficult. In any case, GM is moving in the right direction. The fact that the bondholders are submitting proposals—and making it public to counter Rattner’s claims that they are being difficult—indicates that some of them are willing to deal. They clearly feel enough pressure from the government and the glare of public scrutiny to say that they are willing to bargain. But much work remains.

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