General Motors’ bondholders are likely to reject an offer to exchange debt for equity, research firm KDP Investment Advisors has said.
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GM is expected to make a formal offer to bondholders before 30 April to swap their unsecured debt for equity ahead of the US government’s 1 June deadline to prepare a restructuring plan.
“We expect the ownership stake offered to bondholders would be unattractive – maybe in the 20% range,” KDP analyst Kip Penniman said in a research report cited by Reuters.
GM has apparently narrowed its restructuring options down to three: restructure outside bankruptcy; negotiate a ‘prepackaged’, or prearranged bankruptcy; or separate its attractive assets from the weaker brands inside bankruptcy in a ‘Section 363’ sale, Penniman was quoted as saying.
Under Section 363 of the US bankruptcy code, GM could sell its more valuable assets to a new company, while bad assets would be liquidated.
Reuters said GM also has US$1.5bn in convertible notes due on 1 June, the deadline for it to submit a revised restructuring plan to the government.
Those bonds can be converted into GM shares, which traded at $1.76 on Tuesday, suggesting the debt may be essentially worthless for bondholders, the report added.
GM bondholders are willing to make “deep concessions” if GM can produce a viable business plan and get equal concessions from other stakeholders, a source told the news agency last week.
Penniman said GM’s exchange offer would be likely to fail so negotiations would then turn towards a pre-packaged bankruptcy.
“We believe GM could achieve a greater than two-thirds reduction in its unsecured debt in a prepackaged filing while negotiating significant concessions with the United Auto Workers,” Penniman said.
He added he expected the autos task force to threaten pursuit of a Section 363 sale as negotiations with debtholders proceed.
However, a Section 363 sale is not a viable option for creating a new GM, Penniman said.
“We simply do not believe the plan could be implemented quickly enough to avoid significant damage to GM’s value,” Penniman said. “Claimants including bondholders, the UAW, retirees, suppliers and vendors would all exercise their legal right to voice their arguments and bog down the process.”
