GM's Talks With Bondholders Go Down to the Wire

"In a way, it's a game of chicken," Sen. Bob Corker said of the talks between GM and its bondholders. (Susan Walsh - AP)
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By Kendra Marr
Washington Post Staff Writer
Friday, February 13, 2009

With a deadline just days away, General Motors bondholders still have not signed off on concessions aimed at helping the struggling automaker win additional federal aid, said people familiar with the deliberations of a committee representing bondholders.

Under the conditions for receiving government loans, GM must try to reduce its $27.5 billion in unsecured debt to at least $9.2 billion by Tuesday through a debt-for-equity swap. The automaker has already received $9.4 billion in federal loans. It could get $4 billion more if it achieves certain concessions next week from various stakeholders including bondholders and employees.

A group of 10 bondholders have been reviewing the automaker's tentative business plan. They are waiting to see whether the United Auto Workers will agree to shrink labor costs to become competitive with Nissan, Toyota and Honda, according to those familiar with the talks. Without a better picture of the future of their investment, bondholders are unable to assess a value and finalize any agreement.

"We can't do a deal that leaves GM not competitive," said a person familiar with the bondholders' thinking, who spoke on the condition of anonymity because the talks are private.

At the same time, the union appears reluctant to wrap up negotiations without knowing what bondholders will do. The UAW is set to become a large GM shareholder because the Treasury has mandated that at least half of the company's payments to a union-run health care trust be paid in stock.

"Of course the UAW does not want to be one of the first at the table to negotiate all sorts of concessions without knowing more about the bondholders and federal assistance," said Mark Oline, an analyst with Fitch. "The tricky thing is that all parts have to come together simultaneously."

The UAW could not be reached for comment. GM spokesman Tom Wilkinson declined to comment on negotiations with stakeholders.

Bondholder negotiations are less crucial for Chrysler, which received $4 billion in federal loans, because most of its debt is secured. Nevertheless, the inability to reduce unsecured debt by at least two-thirds puts the both automakers' loans at risk of being revoked, increasing the likelihood that they would have to file for bankruptcy protection. In a bankruptcy reorganization, bondholders could get nothing.

The face-off between GM bondholders and the union punctuates the frustration some in Congress have expressed over the pace of the restructuring negotiations and the concern that the benchmarks might not be met in time. "In a way, it's a game of chicken," said Sen. Bob Corker (R-Tenn.), whose said earlier this week his office has become a "switchboard operator" for stakeholders in recent weeks.

Analysts expected the appointment of a "car czar," the person who will ultimately review the automakers' viability plans, to speed up the talks by clarifying the government's mandates.

"They don't know how stringent the oversight is going to act," Corker said. "It creates some vagueness."

Eric J. Selle, a J.P. Morgan Chase analyst, wrote Wednesday that GM's debt load is not the cause of its need for government assistance, and that he tends "to side with bondholders in these negotiations, as the shared sacrifice argument falls flat."

"We believe GM's debt is much too high relative to its earnings; however, roughly half of GM's debt was incurred to fund its pension plan in 2003," Selle wrote. "In addition, its $3 billion interest carry doesn't provide as much of a competitive disadvantage as its union wages, benefits and work rules."

It is unclear how deep any concessions must be. Under the terms of the Treasury's loan, the companies can deviate from the specific targets -- such as the two-thirds debt-for-equity swap -- if GM makes the business case that any divergence does not negatively affect its long-term viability.

There is some precedent for holding out. GM's lending arm, GMAC, initially said it needed 75 percent of its bondholders to change the terms of their investments to become a bank and access the financial rescue plan. After many bondholders balked, the company persuaded the Fed to accept its bank application anyway and give the finance arm $6 billion in loans.

The bondholders can be a tough crowd. Before the government stepped in with bailout funds, GM attempted a debt-for-equity swap in an effort to generate fresh cash. Even under the company's threat of bankruptcy, bondholders refused.

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