A Stock Windfall for GM's Creditors

Creditors of General Motors' (GM) bankrupt predecessor, who will likely get about $5 billion from the new automaker's $20 billion initial public offering, might be able to buy millions more new shares at a deep discount.

GM's bankrupt estate got 150 million shares, or 10 percent of stock in the new company, to help pay off creditors. At the Nov. 19 closing price of $34.26, that stock is worth about $5.1 billion. So-called old GM has warrants that entitle it to buy about 273 million additional shares at $10 to $18 each, according to the company's Nov. 17 filing with the U.S. Securities and Exchange Commission. The warrants will become even more valuable if GM shares rise. At least one analyst expects they will. "We value the shares of the new GM at $45," says Kirk Ludtke, a senior vice-president at CRT Capital Group in Stamford, Conn.

The estate's creditors received rights to the shares after GM bondholders with about 54 percent of the carmaker's $27 billion in debt agreed to support a plan that swapped debt for equity. The bankrupt company, now known as Motors Liquidation, is still counting up creditors' claims, which totaled $35.7 billion as of Sept. 30, according to its last monthly operating report.

If unsecured claims end up exceeding $35 billion, the estate would get at least 10 million additional GM shares. If claims go as high as $42 billion, creditors could get as many as 30 million new shares, according to the IPO documents. "The stock is certainly worth more than almost anyone thought at the time," says Chip Bowles, a bankruptcy lawyer at Greenebaum, Doll & McDonald in Louisville.

When GM filed for bankruptcy in June 2009, it sold its most valuable assets, including its Cadillac and Chevrolet divisions, to a new company. Unwanted properties, such as outmoded factories and its Saturn division, were left under bankruptcy-court protection and are to be liquidated under a plan that repays loans from the U.S. Treasury and Canada.

While the IPO revenue is a potential boost for creditors, some holders of the old GM's bonds believe they should be getting more money now that the company has been revived. "The big issue that will be debated for a long time is whether the value being raised in the IPO is really value that should have been part of the estate for old creditors," says Michael P. Richman, chairman of Patton Boggs' restructuring practice, who represented bondholders challenging the government's plan for GM in June 2009.

The creditors won't get any stock until they agree on a liquidation plan and a judge approves it. One unresolved issue is General Motors' asbestos liability, which GM's estate estimates at $648 million. A committee of creditors said in court filings that the amount may be 5 to 10 times that much. Lack of consensus on a plan is "delaying distribution to literally thousands of innocent creditors," U.S. Bankruptcy Judge Robert E. Gerber said in a Nov. 22 hearing.

The bottom line: GM's successful public offering is providing money to pay off creditors of the bankrupt company, who have warrants to buy more shares.

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