Some GM Bondholders Protest Federal Loan Terms

Juan Carter repairs a press earlier this month at a General Motors plant in Parma, Ohio. GM is running with the help of a $13.4 billion government loan.
Juan Carter repairs a press earlier this month at a General Motors plant in Parma, Ohio. GM is running with the help of a $13.4 billion government loan. (By Mark Duncan -- Associated Press)
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By Peter Whoriskey and Kendra Marr
Washington Post Staff Writers
Saturday, March 21, 2009

Some of General Motors' creditors are balking at the terms of the company's government rescue loan, arguing that the federally imposed conditions treat them unfairly.

The objections from the bondholders raise the possibility that the government's $13.4 billion loan to the company could be called in and will at the very least complicate the company's request for more aid.

The existing government loan was extended in December with the understanding that General Motors would get the bondholders to swap two-thirds of their bonds for an equity stake in the company. The company as yet has been unable to wrest such an agreement from the owners of an estimated $27 billion in bonds, however, and now the owners are signaling their reluctance to meet the federal loan framework.

"Under the parameters set forth in December under the bridge loan agreement, bondholders are being asked to take nearly all of the risk of the viability of this enterprise going forward," said a source familiar with the thinking of one major group of bondholders. "It's important that people understand the implications of what the government proposed . . . . Bondholders would be walking away from two-thirds of the principal, and they'd be left with highly speculative securities. Everyone else is walking away with far more."

The group expressing concern represents a significant percentage of the outstanding bonds, but not a majority.

While the original loan agreement was drafted by the Bush administration, it is being implemented by Obama's auto task force. That group's leader, Steven Rattner, has publicly expressed frustration with the bondholders. A source familiar with the negotiations and the administration's thinking said the task force is reluctant to change the loan terms.

"The bondholders have a requirement under the loan agreement, and the government expects them to comply with it," said the source.

However, the bondholder source, who spoke on condition of anonymity because of the sensitivity of the negotiations, called it a "presumption" that GM cannot alter the loan terms set forth in December by the Bush administration.

The bondholders' comments follow their request that the government guarantee a portion of their holdings -- a request that has so far been rebuffed by task force members. If anything, it should be the government getting more concessions given the industry's struggles, not less, the task force told the bondholders' representatives.

The bondholders' main rival in the ongoing GM negotiations is the United Auto Workers. The union is trying to reach its own agreement over a company payment to a retiree health plan. GM is supposed to hand over an estimated $20 billion for the plan. But under the terms of the federal loan, the retiree health plan is being asked to swap half of what it is owed for an equity stake.

While some bondholders have argued that the UAW should sacrifice more to save GM, the union has countered that it has already made sacrifices, including concessions in 2005 and 2007 that dropped the company's obligation to the retiree health plan by 40 percent.

"We think the bondholder position is ridiculous," said Alan Reuther, legislative director for the United Auto Workers. "Basically they've been saying go whack the retirees.

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