General Motors (GM): The Final Hours

“It’s more and more apparent General Motors will file for bankruptcy. >> David: The question now is when? Remember the June 1 deadline? It might happen before that. We have indications it might. And how will it affect bond holders and the workers?” Fox Business Network 5/22/2009

General Motors (GM) bondholders signaled today that they will flat out reject the conversion offer for 10% stake in the failing automaker, which pales in comparison to the portion the U.S. government and the Unions will hold of the restructured GM. The bondholders had suggested willingness to accept a 58% equity stake in the automaker which the Obama administration has stated is unrealistic. For a company with a market cap of less than $1 billion, it would still represent a major haircut for bondholders. The $27 billion worth of bonds are going to go unpaid on June 1st placing GM in default and almost undoubtedly putting bankruptcy filings in motion. However, a report out of the Washington Post today suggests that the Obama administration may force General Motors into bankruptcy as early as next week. Shares are selling off 22% today as equity holders try to abandon the sinking ship.

The last few days had been hopeful ones for the automaker as they had replaced the onerous labor agreements with the UAW with a more sustainable agreement that lowered both labor and health care costs to help them better compete with foreign automakers. In addition, GM’s sale of Opel (the German unit of GM) has attracted quite a bit of attention receiving 3 bids and rumors of a fourth. The stock had rallied more than 70% coming into Friday, even with the possibility of bankruptcy looming large. However, 3 executives knew better than to hold their shares in this situation and collectively sold off more than 200,000 shares according to a Wednesday SEC filings. This is the second time in a month that high level executives have unloaded their stock.

If in fact, the Obama administration does force the company into bankruptcy there will no doubt be a myriad of lawsuits from bondholders who will have been denied the right to negotiate until the predetermined deadline. Perhaps the two sides are still a long way from reaching consensus, but the same could have been said about management and the UAW just a few weeks ago. The point is that it is not up to the government to step in, after all, at this point what good does it serve to cut negotiations off a week early. As Douglas McIntyre points out on

“The attempt by Chrysler creditors to halt or slow that company’s move through Chapter 11 failed in the bankruptcy court. But, those debtors were given until the government’s deadline to complete a deal. That effort may have failed, but the rules were not changed in the middle of the game.

The accusations that the Administration has trampled the legitimate rights of creditors is about to grow louder. A GM Chapter 11 filing before the end of May will be seen as depriving secured lenders and bondholders of a kind of “due process”, and that will send a signal to any other group which holds obligations from an American company receiving US aid.

The Administration’s actions with GM show that if there was ever a point at which the playing field was level, that time is gone. Those creditors that don’t knuckle under will get nothing at all.”

We do not want to get too far ahead of ourselves because the Washington Post story simply states that this early bankruptcy is a possibility and not a certainly. It is clear that sending GM into bankruptcy early would not be fair. Remember, it is the bondholders who are supposed to be paid first during a bankruptcy, they should have the right to protect their property given the fifth amendment right to due process under the law.

The Final Hours of GM

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