TOPICS > Economy

GM Bondholders Strike a Deal As Bankruptcy Deadline Looms

May 28, 2009 at 6:00 PM EDT
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As a bankruptcy deadline looms for General Motors, major bondholders agreed to a deal that offers them a 25 percent stake in the company if they drop opposition to the company's reorganization plan. A reporter explains the negotiations.
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JUDY WOODRUFF: Some of General Motors’ main bondholders agreed today to take as much as 25 percent of the company. G.M. made the disclosure to the Securities and Exchange Commission.

The bondholders agreed to forgive part of G.M.’s outstanding debt of $27 billion. They will also support selling G.M.’s assets to a new company, once the automaker enters federal bankruptcy protection.

The news came as a Monday deadline for declaring bankruptcy ticked closer.

Joining us now to help sort through all this and more on our lead story is David Shepardson of the Detroit News.

Good to see you again. Thanks for being with us.

DAVID SHEPARDSON, The Detroit News: Thanks, Judy.

JUDY WOODRUFF: First of all, David, remind us who these bondholders are.

DAVID SHEPARDSON: These are big institutions — pension funds, universities, banks — that over the years have bought about $27 billion in debt that have helped G.M. fund its operations.

JUDY WOODRUFF: And some individuals, as well?

DAVID SHEPARDSON: Right, about 20 percent are retail investors. They bought so-called baby bonds for as little as $25. But the bulk are held by big institutional investors.

JUDY WOODRUFF: And why was the federal government, which is behind all this, so anxious to get these bondholders on board?

DAVID SHEPARDSON: Well, when the Bush administration gave G.M. that lifeline in December of $17 billion, it required G.M. to cut its debt by two-thirds. I mean, this is a company that’s had way too much debt — over $60 billion — and they had to do something to cut it.

And it was a clear requirement that they chop that debt down, so they gave them a deadline, you know, reduce it by 90 percent, and they offered the bondholders very little. That deal on Tuesday was overwhelmingly rejected.

JUDY WOODRUFF: But why did the — so why did they change their mind? I mean, as you said, as of last night, they were saying no. What turned it around?

DAVID SHEPARDSON: Well, in the end, the government, you know, made it a little sweeter. Instead of just 10 percent equity, now the bondholders can get warrants for 15 percent additional equity, as you said, to control about 25 percent of the company. So at the end of the day, it was about money. The bondholders get a little bit more. The alternative was roll the dice in bankruptcy and potentially get nothing, because they would be behind the government, which is loaning almost $50 billion to the company, the secured debt-holders and the UAW.

A question of timing

JUDY WOODRUFF: And so how much difference in the scheme of things does this make? I mean, G.M. is still going into bankruptcy.

DAVID SHEPARDSON: Right.

JUDY WOODRUFF: So what difference does it make to have them on board?

DAVID SHEPARDSON: It's a big difference because of the time. The bondholders, had they stayed together and rejected this offer, could potentially have thrown a big monkey wrench in G.M.'s exit from bankruptcy.

I mean, they need to get out in a short period of time. The longer it goes on, the more risks there are that customers will shy away from a bankrupt company and opt for another company.

So the government, you know, wants at least two-thirds or more of the bondholders to sign off, which makes the case to a bankruptcy judge to allow the good assets to leave in a short period of time a lot better.

You know, if you have all the bondholders rejecting it, then there's also the political argument that a lot in Congress saying, are you stuffing the Main Street and the institutional investors?

JUDY WOODRUFF: But this is costing the taxpayers, costing the government a good bit of money.

DAVID SHEPARDSON: Well, we don't know at the end of the day, because we don't know what the company is worth when it leaves bankruptcy. But you're right. In the end, the government agreed to forgo some of its equity and give it to the bondholders rather than hold the line, because they believed at the end the bondholders could have gotten nothing, since they would have been far behind these other debt-holders.

JUDY WOODRUFF: And, finally, David, how long does this process -- this bankruptcy process expected to take?

DAVID SHEPARDSON: Well, that's the real question. I mean, Chrysler is going much better than anybody expected. They could be out by Friday. They could be in their partnership as early as a week.

And we hope -- or they hope it will be 60 to 90 days. And I think that's a realistic timetable, given that almost all the stakeholders are falling in line.

JUDY WOODRUFF: All right, big development. David Shepardson, the Detroit News, thanks very much.

DAVID SHEPARDSON: Thanks, Judy.