General Motors to Enter Bankruptcy on Monday

General Motors’ bondholders received a much better deal this morning than the previous offer of a 10 percent stake in the company if they did not oppose the company’s bankruptcy filing. It is now reported that the company will file for bankruptcy this Monday.

According to the Detroit Free Press, GM will officially file for bankruptcy on Monday. This news comes after at least one-third of the company’s bondholders agreed to a new debt-for-equity swap offered this morning.

Also revealed is the U.S. Treasury’s plan to give the American automaker at least $30 billion more to pay for the bankruptcy. This is on top of the $19.4 billion already lent to GM and is much more than the earlier reported total of up to $27.2 billion if the automaker declared bankruptcy. In return for the total of almost $50 billion given to GM, the U.S. Treasury would hold a 72.5 percent stake in the new GM.

This is where the new deal with GM starts to get a little fishy. The Treasury is reported to have a 72.5 percent stake in the new GM, the UAW was earlier going to have at least a 17.5 percent stake in the new GM, and the bondholders are now going to have a 25 percent stake in GM. Something doesn’t add up.

The key in the bondholders stakes compared to the Treasury’s and UAW’s stakes in the new GM is that the bondholders get GM as a whole, both good and bad assets. Ten percent of the bondholders equity is in the new GM, which completes the stake in new GM, and the other 15 percent is given in bad GM assets.

The 15 percent stake in bad GM assets will be the majority of claims against the bad GM assets and be given to the bondholders -- essentially after “good GM” buys back the “best” parts of “bad GM” -- in two steps after certain goals are reached. The first half of the bad GM assets will be given after the new GM is worth more than $15 billion and the last of the stake will be given after the value of the new GM reaches $30 billion.

GM said that under today’s offer the company would emerge from bankruptcy with $17 billion in debt, including the $8 billion owed to the Treasury and $2.5 billion to the UAW. The Treasury would also carry $2.5 billion in preferred shares and the UAW another $6.5 billion in preferred shares.

The bankruptcy plan still calls for GM to enter and exit extremely quickly. “Everybody would have an incentive to get in and out as quickly as possible,” said GM vice chairman Bob Lutz. “A Chapter 11 that lasted for months and months would be very damaging.”

Source: The Detroit Free Press