GM Unveils Debt-For-Stock Swap Plan
By: Staff

By Stephen Bernard -- AP Business Writer
General Motors Corp. on Monday unveiled a plan to swap its debt for common stock — a move that could potentially help the storied U.S. automaker stave off a bankruptcy filing by significantly alleviating its debt burden.

GM currently has about $27 billion in unsecured debt. If the company wants to avoid bankruptcy, it needs to retire most of that debt while simultaneously exchanging half of the loan it received from the government for stock as well. Further, GM is asking the United Auto Workers union to accept stock for at least half of the $20 billion the company must pay into a retiree fund beginning next year.

Those moves could provide enough leeway for GM to avoid bankruptcy and continue to revamp its operations to remain solvent.

How exactly will the proposed exchange of debt for stock work, and is it likely to be successful? Here are some questions and answers.

Q: What's involved in the debt-for-equity swap?

A: General Motors is offering to give investors common stock in its company in exchange for unsecured debt the investors currently hold.

Unsecured debt is essentially a loan or bond that must be repaid with interest, but that is not backed by any assets, meaning that those who hold it are at risk of losing their entire investment if a company fails and is unable to pay back the loan. There is no asset for an investor to claim ownership of when unsecured debt fails to be repaid, in contrast to, say, a mortgage, where the bank gets the house in the event of a default.

Common stock, meanwhile, is a direct ownership stake in a company, whose value fluctuates based on increases or decreases in the share price.

Just as GM wants investors to swap debt for stock, the company is looking to get the government to replace most of its loan to the Detroit-based automaker with common stock as well. That would allow GM to rid itself of another $10 billion in debt as it looks to sharply reduce future costs of repaying the debt and loans with interest.

The government has extended GM more than $15 billion in loans amid the credit crisis and recession that has led to flagging sales for the automaker and seriously hindered its ability to remain solvent.

Overall, the deal would help GM reduce its debt by about $44 billion from the current $62.4 billion. It would also significantly help cash flow as the company's regular payments on the bonds and debt would be drastically reduced.

Q: What specifically is GM offering debt holders?

A: GM is offering 225 shares of common stock for every $1,000 of debt. Based on Monday's closing price of $2.04, bond holders would get about $459 in GM stock per $1,000 of debt, or nearly 46 cents on the dollar. In contrast, GM debt has been trading recently for less than 10 cents on the dollar.

That 46 cents on the dollar figure may ultimately be unrealistic, though — with so many new shares being issued for the debt-for-stock swap, the value of the stock could be dramatically diluted. Kip Penniman Jr., an analyst with KDP Investment Advisors Inc., said GM's offer to bond holders represents just five cents for every dollar of debt once the diluted stock value is factored in.

Q: What does GM need to complete this swap?

A: GM needs debt holders who own 90 percent of the bonds to accept the deal in order to complete it. That would allow GM to retire about $24 billion of the $27 billion in outstanding bonds. It also needs the government to sign off on exchanging a portion of its loan for common stock.

If either of those things fails to happen, the whole deal could fall apart.

Q: What does this deal mean for current shareholders?

First and foremost, it means the company would likely avoid bankruptcy and thus current shareholders would not lose their remaining investments in the company. But, at the same time, it also drastically reduces the ownership stake of current shareholders. If the debt and loan exchange are completed, current shareholders would own only 1 percent of the company.

Q: What are the odds debt holders will agree to the deal?

A: Penniman said he doesn't expect the offer to get anywhere near the participation it needs. As a result, he expects the automaker to enter bankruptcy protection on June 1.

But not everyone agrees with that assessment. Robert Scott, a senior international economist as the Economic Policy Institute, said there is a moderate likelihood GM debt holders will approve the deal. The alternative, he said, would likely mean a smaller stake in a smaller company and less cash if GM files for bankruptcy protection and then re-emerges from the proceedings.

Van Conway, president and co-founder of Conway MacKenzie Inc., said the question isn't if this is a good deal for debt holders, but instead if this is the best deal they can expect.

"If bond holders and their advisers believe the company is viable, it's probably best to take the stock," Conway said. "You could get some appreciation in the stock and get some recovery."

Q: If the offer fails, what would happen?

A: GM would likely file for bankruptcy protection.

A bankruptcy proceeding would not necessarily end GM; it could just give it time to restructure its debt. Coming out of bankruptcy, GM could have a vastly different look depending on the terms of the restructuring.

For debt holders, not agreeing to the deal could leave them out in the cold completely. Unsecured debt holders will have to wait in line for more senior investors, such as the government or secured debt holders, to get paid off in a bankruptcy proceeding before they have any chance at recovering their investments.

"Often, once you get into bankruptcy, terms tend to get worse," said Mike Boudreau, a director at Bloomfield Hills, Mich.-based consulting firm O'Keefe & Associates. That provides an impetus for debt holders to reach an agreement before a bankruptcy filing.

Boudreau said at least with this agreement, debt holders would know what they are getting. In bankruptcy, there would be no certainty of what kind of deal might be reached.

Q: What happens if the deal is successful?

A: If it can complete the debt exchange, GM would likely avoid bankruptcy protection and continue to operate. But even that will come with some caveats. GM said Monday, aside from the debt exchange program, it plans to slash 21,000 U.S. factory jobs by next year and phase out its Pontiac brand.

-- AP Auto Writer Kimberly S. Johnson in Detroit contributed to this report.

Copyright 2009 The Associated Press.  All rights reserved. This material may not be published, broadcast, rewritten or redistributed.

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