All Eyes Turn to GM And Its Bondholders

As Chrysler began its journey through bankruptcy in a New York courtroom yesterday, members of the administration's autos task force had already turned their focus toward a larger and more daunting problem: General Motors.

GM is the world's second-largest automaker, a massive global operation that employs hundreds of thousands of people, while Chrysler is much smaller, privately-owned and reliant mostly on domestic sales.

But in the coming weeks, reaching an agreement with GM's diverse collection of bondholders, who range from large corporations to ordinary Americans, will be the key to preventing the company from an outcome similar to Chrysler.

Chrysler's troubles were on full display yesterday as it posted a 48 percent drop in sales in April, the steepest in the industry and perhaps a harbinger of the damage that bankruptcy could cause to consumers' trust.

The president on Thursday blamed Chrysler's bankruptcy on a handful of investment firms and hedge funds -- "a small group of speculators," he called them -- who had shunned the government's offer to pay the company's lenders $2.25 billion of the $6.9 billion they were owed, essentially sealing the carmaker's fate. That same afternoon, task force members met with representatives of GM's bondholders, a vastly larger group with claims to nearly four times as much money.

"The stakes are higher because [GM] is bigger and more complex. The risks are higher," said David Cole, chairman of the Center for Automotive Research.

Differences between the creditors to Chrysler and GM could alter the course -- or at least the tenor -- of the negotiations. The Chrysler holdouts were secured lenders, meaning they have a direct claim on the company's assets and legally would receive priority in a bankruptcy proceeding. Most bondholders are unsecured and face a higher risk of getting wiped out in court.

GM unveiled a proposal this week that would lay off 21,000 workers, streamline operations and give the government a majority stake in the company. The bondholders would not fare particularly well under the offering, which was filed with the Securities and Exchange Commission.

GM wants investors holding $27.2 billion of the company's bonds to swap them in exchange for 10 percent of the equity shares of the restructured company. The United Auto Workers would get up to 39 percent of the company in return for half of the $20 billion GM owes to a health fund for retired workers. Current shareholders would get 1 percent of the new shares.

The Treasury said that to meet restructuring goals and to fulfill bond covenants, the restructuring proposal must win the support of 90 percent of GM's bondholders, a questionable proposition, considering many of them dismissed the offer as "neither reasonable nor adequate." GM chief executive Fritz Henderson has said if the bondholders reject the terms, the company most likely would declare bankruptcy, plunging suppliers, workers and customers into deeper uncertainty.

Currently, GM bonds are selling for about nine cents on the dollar. As the holders of those bonds consider the offer to swap them for an equity stake in the company, a key calculation is how the value of the bonds compares to the stock they would receive in exchange.

Some bondholders believe that the current government offer amounts to less than nine cents on the dollar. If the holders of more than 10 percent of the remaining bonds feel the same, they likely could force GM into bankruptcy.