DETROIT -- General Motors gm has struck a deal with 20% of its bondholders to swap shares in a newly formed automaker once the company emerges from bankruptcy, the company said in a filing with the Securities and Exchange Commission on Thursday.
The deal, brokered by the U.S. Treasury Department, will give shareholders a 10% stake in the new GM and warrants to buy 15% more of the automaker at a deep discount, the filing says. But the deal is contingent on GM filing for a section 363 bankruptcy, which would split the automaker into "good" and "bad" parts.
A person familiar with GM's plans said it is "probable" that the company would file for bankruptcy protection on Monday. The person didn't want to be identified because the plans were still under discussion with the U.S. and Canadian governments.
The government proposal is similar to the approach taken in the bankruptcy reorganization approach used by Chrysler. Its plan to shed assets and sell control of a downsized carmaker to Fiat, aided by government financial assistance, could receive final approval from a bankruptcy court judge in New York before the end of the week.
A senior Obama administration official estimated that GM would be under bankruptcy protection for 60 to 90 days, which is longer than Chrysler's reorganization because of the size and complexity of GM. The official spoke on condition of anonymity because of the sensitive nature of the ongoing preparations.
Remaining bondholders have until 5 p.m. ET Saturday to agree to the terms, which would erase $27.2 billion off GM's books. A group representing GM's biggest bondholders has already agreed to the terms.
In exchange for a larger share of the company, the bondholders agree to not oppose a sale of GM's good assets into the new company.
"Implementation of this proposal would result in a new GM with a healthy balance sheet, putting the new company on a clear path toward long-term viability and success," the company said in a statement.
Treasury would own about 72.5% of GM when it emerges from bankruptcy, according to the filing.
The bondholders rejected an earlier proposal that would have given them a 10% stake in company. A trust held by the United Auto Workers will get 17.5% of the company and warrants to buy 2.5% more.
"While the committee continues to remain troubled by preferential treatment that the UAW ... is receiving compared to the bondholder class — rejecting this offer in the expectation that the bondholders will do better in a litigated outcome was a risk the committee is unwilling to take," the bondholder committee said in a statement.
The bondholders' committee says Treasury has agreed to "advance substantial additional funds to GM" and convert about $40 billion to equity in the new company. The increased financial support from Treasury "gives the bondholders the opportunity to recover a greater portion of their original investment than was previously offered," they said in the statement.
A coalition of retail bondholders, meanwhile, continues to oppose the offer. The group said the new offer remains unfair to retirees who depend on GM bonds for income and is overly favorable to the UAW.
"From the beginning there's been a lack of transparency in this entire restructuring process," said Jim Martin, president of the retiree group 60 Plus Association, in a statement. "No one seems to have the best interests of small bondholders at heart."
United Auto Workers President Ron Gettelfinger said Thursday he does not want to get into a debate with bondholders while the union is pushing for ratification of concessions to GM.
"An objective person that stood back and looked at all the sacrifices that have been made by active workers and retirees would see that we have made tremendous sacrifice," he said. The union's role, he said, was to get the best deal it could for active members and retirees.
FAQs
Essentially, bondholders get an IOU from the company. GM bondholders are owed $27 billion. Now, GM is offering them 10 percent equity in a new, reorganized company.
Are bondholders secured creditors? ›
Investors holding bonds in bankrupt companies can at least have the comfort in knowing that as unsecured creditors they are second in line for payment.
Who is bond holder? ›
A bondholder is an entity that invests in or owns bonds. Bondholders hold debt securities that are typically issued by corporations and governments. They essentially lend money to bond issuers by giving them capital. In return, bond investors receive their principal or initial investment back when the bonds mature.
What are the rights of a bondholder? ›
Bondholders have the right to receive periodic interest payments and the repayment of the principal amount upon the bond's maturity. These payments' specific terms and conditions are outlined in the bond's indenture, which is the legal agreement between the issuer and bondholders.
What happened to GM bond holders? ›
During recent bankruptcy court proceedings, it was determined that all amounts outstanding under GM's secured debt, close to $6 billion, were to be repaid in full. In other words, while equity and bondholders forfeited billions, investors in the term loan were made whole, even in the direst financial circ*mstances.
How much did taxpayers lose on GM bailout? ›
WASHINGTON (Reuters) - The U.S. government lost $11.2 billion on its bailout of General Motors Co , more than the $10.3 billion the Treasury Department estimated when it sold its remaining GM shares in December, according to a government report released on Wednesday.
What happens to bondholders when a bank fails? ›
Once a company files for bankruptcy, bondholders no longer receive principal and interest payments. When the process is complete, they may receive newly issued bonds, cash, or stock whose value may not equal the value of the bonds they owned.
What happens to bondholders in case of default? ›
What bond holders receive after the default—and when they receive it—can vary significantly. Recovery proceeds may come in different forms, including as a newly issued bond, cash, stock, or some combination of the three, and the process can take anywhere from a few months to several years.
Do bond holders get paid first? ›
In the event of company bankruptcy, secured creditors generally get paid first. This may in fact include bondholders if the bonds are “secured.” This usually happens if the bonds are backed by physical property, which may also be real estate.
What is the primary risk that bondholders face? ›
one key risk to a bondholder is that the company may fail to make timely payments of interest or principal. If that happens, the company will default on its bonds. this “default risk” makes the creditworthiness of the company—that is, its ability to pay its debt obligations on time—an important concern to bondholders.
Junk bonds are bonds that carry a higher risk of default than most bonds issued by corporations and governments. A bond is a debt or promise to pay investors interest payments along with the return of invested principal in exchange for buying the bond.
What is the conflict between bondholders and shareholders? ›
Bondholders and stockholders may have interests in a corporation that conflict. Sources of conflict include dividends, distortion of investment, and underinvestment. Protective covenants in bond documents work to resolve these conflicts.
How does a bondholder make money? ›
In return for buying the bonds, the investor – or bondholder– receives periodic interest payments known as coupons. The coupon payments, which may be made quarterly, twice yearly or annually, are expected to provide regular, predictable income to the investor..
Which bond type has the lowest risk of default? ›
Treasury bonds are viewed as essentially free from the risk of default because the government can always print more money to meet its obligations.
Are bonds legally binding? ›
A trust indenture is an agreement in a bond contract made between a bond issuer and a trustee that represents the bondholder's interests. An indenture is a legal and binding contract, often between a bond issuer and bondholders.
Did GM stockholders lose their stock? ›
The shareholders lost everything. GM (General Motors) was a $50 stock that went to zero — they went bankrupt — belly up! I think the government didn't like the fact that there would be only 2 American car companies left: Chrysler and Ford.
Did GM workers lose their pensions? ›
During the 2008 global financial crisis, when GM and Chrysler went bankrupt, the union agreed to massive concessions in benefits, which included their pensions. The workers attempted to get their pensions back during the 2019 movement “Unite All Workers for Democracy,” but the negotiations failed after a 40-day strike.
Did GM ever pay back the bailout money? ›
April 21, 2010— -- General Motors today $8.1 billion in government loans repaid, five years ahead of schedule and nine months after the troubled auto giant declared bankruptcy, signaling that the auto maker may be on the path to profitability.
What happened to GM stock holders in 2008? ›
Common stock holders in the old General Motors were essentially wiped out, watching their shares morph into shares of Motors Liquidation. The common stock originally traded on the Pink Sheets but was later canceled. Meanwhile, shares of the new GM, which went public in 2010 have held up reasonably well.
