In Treasury’s Court: GM Bondholders’ Proposal

They urge the U.S. to scrap the automaker's restructuring agreement and avert "dire consequences."
Sarah Johnson and Stephen TaubMarch 23, 2009

What’s good for General Motors? That’s the “other issue” for Treasury Secretary Timothy Geithner as he readies a plan today to take a huge step toward buying up troubled bank assets.

Sitting on his desk on this busiest of days is a letter from GM bondholders urging Treasury to scrap the automaker’s restructuring agreement. The letter, asserting that the agreement will result in a bankruptcy that “would have dire consequences for the company,” calls for the government to agree to an alternative plan offered earlier this month.

“GM bondholders have been asked to make deeper cuts than other stakeholders,” said Houlihan Lokey Howard & Zukin Capital, Inc., financial advisor to the unofficial committee of GM bondholders, in a letter fired off to Treasury Secretary Timothy Geithner and the auto task force. The investment adviser noted that the current plan would reduce two-thirds of the bondholders’ principal and trade it for speculative securities that may if the currently planned cost reductions and sales projections prove inaccurate, end up having little or no value.

“It appears a purely arbitrary decision was made in December as to what bondholders would receive,” the letter said, asserting that all other parties involved in the restructuring process will walk away with far more, with many being paid in full. “It is unclear why it was decided that GM’s bondholders should bear the greatest risk here.”

Specifically, GM wants bondholders to swap debt valued at $27.5 billion for $9.2 billion and equity in the automaker, according to press accounts. According to Bloomberg News, the biggest holders of GM debt are Franklin Resources Inc., Fidelity Investments and Capital Research & Management Co.

The letter pointed out that on March 5 advisors to the ad hoc bondholder committee presented an alternative debt-to-equity exchange plan to the Presidential Task Force on the Auto Industry. It did not provide details of the plan, but stressed that the framework presented at the meeting meets two important objectives: fitting with the government’s restructuring objectives under the terms of the UST bridge loan, and providing “the best chance, working within the restructuring parameters of completing the out-of-court restructuring desired by all parties. That would involve securing the necessary high-level  acceptance among a diverse group of GM bondholders, the letter stated.

“It is only with this high level of acceptance from the thousands of holders of $28 billion of GM debt that GM can successfully be restructured out of court,” said the letter. It said that the framework would receive a high level of approval both from institutional investors, who hold roughly 80 percent of GM’s unsecured debt, and from retail investors, who hold the remaining 20 percent in small blocks. The deadline for the exchange is March 31.

 “Unless the framework we suggested is utilized, the restructuring currently contemplated will not achieve the required level of acceptance to succeed on an out-of-court basis,” the letter warned.

To deal with that “other problem” — the nation’s banking crisis — Geithner’s latest plan involves offloading so-called toxic assets from the banks’ books. He calls for a combination of public and private funds to buy mortgage-backed securities that have sat in illiquid markets. He predicts his plan will result in true market prices for these assets, along with freeing up bank credit, presumably to all companies.

Treasury’s previous fixes for improving the financial crisis have included the U.S. automakers; in December, the agency gave GM $13.4 billion in loans from the $700 billion Troubled Asset Relief Program, whose funds have mostly been designated for financial institutions.