GM offers a debt for equity swap to bondholders

As the possibility of bankruptcy draws nearer, General Motors is moving to sell non-core assets and to broker arrangements with bondholders and unions alike which will keep it out of bankruptcy. In a 9AM press conference today, new General Motors head Fritz Henderson announced a debt-for-equity swap offer for GM bondholders which would cut debt dramatically at the company. It is also looking to make some substantial cuts in workforce as well as eliminating venerated brands like Pontiac.

General Motors Corp. said Monday it will continue to reduce its work force and dealer network and eliminate its Pontiac brand by the end of next year as the auto maker works furiously to survive

GM is also starting an exchange offer for $27 billion of its unsecured public notes as part of its restructuring plan, saying a successful exchange offer would allow it to restructure out of bankruptcy court.

The company said by the end of the year, it will employ 21,000 fewer hourly workers than it does now.

The company is offering to exchange 225 common shares for each $1,000 principal amount of outstanding notes. The stock closed Friday at $1.69 a share and shares were recently up 11% at $1.87 in premarket trading.

The exchange will commence only if 90% of bondholders agree to the terms. Under the plan, if GM fails to get adequate participation, it would file for bankruptcy protection.

GM, which is surviving on federal loans, is racing to restructure by June 1 under close watch of the Obama administration.

The U.S. Treasury will extend an additional $11.6 billion to GM, in addition to $15.4 billion in existing loans. The government will forgive half the debt in exchange for equity in a restructured GM.

GM, in setting forth tough terms for a bond exchange and requiring almost compete participation, has stepped up the likelihood for a Chapter 11 filing on June 1 without further government intervention.

The company said it will focus on four core brands in the U.S. — Chevrolet, Cadillac, Buick and GMC — as it looks to make fewer different models and focus on product development programs.

It will also restructure its U.S. dealer organization, reducing its U.S. dealer count by more than 40% by the end of next year, a reduction of 500 more dealers four years sooner than its earlier viability plan.

Chief Executive Fritz Henderson said the company is taking “tough but necessary actions” that are critical to GM’s long-term viability.

The company added that negotiations regarding contract changes with the United Auto Workers union are still ongoing.

In my view, the success of GM’s plans hinges very much on its ability to cut its mammoth debt load. So, it is the debt-for-equity swap which is most important. Let’s see what reaction this announcement receives from bondholders.

I am unclear as to whether a debt-for-equity swap could count as a default event in the Credit Default Swap market.

GM Scrambles to Survive – WSJ

  1. CreditTrader says

    Hey Ed, the ‘voluntary’ nature of the exchange does indeed make it uncertain as to whether CDS will be triggered (think RESCAP last year) and we note that 5Y GM is 4pts better today at 84/86% upfront…They only have $2.7bn outstanding which interestingly is around 10% of the notional bonds outstanding.

  2. Edward Harrison says

    @CreditTrader, that is interesting. What about its being voluntary makes it questionable? Of course that leaves some to game the system like PIMCO did in the GMAC deal. I would imagine it would be a default if the exchange were an involuntary swap.

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