After Bond Deal Fails, Bankruptcy Likely for GM

The deal was a last effort for the struggling automaker to
avoid bankruptcy and Chapter 11 reorganization appears likely, according to
media reports. GM offered to exchange $27 billion in unsecured debt for 10
percent of the company’s stock.

The company’s bondholders, however, were not enthusiastic
about the deal.

The financial institutions and individual investors involved
in the offer said the deal offered them too small of a stake for the amount
they are owed.

“They clearly have different valuation opinions as to
how much the shares are worth,” said John Pottow, a professor at the University of Michigan who specializes in bankruptcy,
according to the Associated Press. “If you’re bullish on the prospects of
the company, you might think that’s a great deal. If you’re bearish on the
prospects of the company, you might not think that’s a great deal.”

The Obama administration has said it would only provide more funds if 90 percent of the bondholders, as well as unionized workers, agreed to concessions that substantially reduced GM’s costs.

For its next step, the company’s board of directors will
meet to review its remaining options as the company inches closer to what could
be the largest U.S. industrial bankruptcy.

GM
spokesman Tom Wilkinson told news agencies the board will meet later this week
to decide its next move, but he would not say exactly when. He also would not
say if the company would soon file for Chapter 11, nor would he reveal what
percentage of bondholders were willing to accept the offer.

GM must fulfill its debt reduction obligations as part of
the deal with the Department of the Treasury. GM has received $19.4 billion in
federal loans to stay afloat as it faces declining vehicle sales and expensive
obligations to unionized retirees.

President Obama’s administration set the June 1 deadline for
GM to complete a restructuring plan to reduce debt, cut labor costs and close
some of its manufacturing plants.

“I think the task force made that hurdle so high, they
wanted them to go into bankruptcy. They see that as the solution,” said
independent auto industry analyst Erich Merkle said Tuesday, according to
Reuters.

The failed bondholder deal could mean GM follows the path of
Chrysler LLC, the smaller American automaker that is undergoing a
government-financed bankruptcy. Chrysler
filed for bankruptcy protection April 30, after the government ended talks with
a group of holdout debtholders.

On Tuesday, the United Auto Workers union said it would take
a 20 percent stake in GM. The federal government share could reach as high as
69 percent, according to the Associated Press and other news reports.

The stock market reacted early Wednesday as GM shares lost
17 cents, or 11.8 percent, at $1.27 in morning trading.

Since December, the federal government has provided some $36.6
billion to GM, Chyrsler and their financing units. The last Big Three
automaker, Ford Co., has not accepted any government funding.

Chrysler will be back in court
Wednesday to ask a bankruptcy judge to allow it to sell the bulk of its assets
to a group headed by Italy’s
Fiat automaker in hopes of saving itself from liquidation.

Attorneys for Chrysler maintain that
the deal with Fiat Group SpA is the company’s only hope to avoid being sold off
piece by piece, but the agreement has met resistance with more than 100
objections to the sale filed by the automaker’s dealers, bondholders, former
employees and others, Reuters reported.

If the deal doesn’t close by June
15, Fiat could back out.