- The Washington Times - Friday, May 29, 2009

General Motors and the White House on Thursday sweetened their offer to investors holding $27 billion in GM bonds in an effort to clear the main obstacle to a quick bankruptcy reorganization of the Detroit giant.

White House officials were confident that the offer of warrants to acquire an additional 15 percent share in the new GM, on top of the 10 percent share already offered, would be attractive to a majority of the thousands of individual and institutional investors who rejected the earlier deal.

A committee of major mutual funds and other institutional investors holding a fifth of GM’s debt immediately took up the offer and said it would work to get others on board before a Saturday deadline.

“We think the plan has a high probability of success,” said a senior administration official, who warned that bondholders who do not accept the deal “should expect little recovery” of their investment in bankruptcy.

The unexpectedly generous last-minute offer to bondholders uses the same divide-and-conquer strategy that the White House used with Chrysler’s lenders to create a split between investors who are ready to work with the government and those who want to fight the forced settlement in court.

The Chrysler strategy has been successful in minimizing and sweeping away opposition to the swift restructuring of that automaker in a Manhattan, N.Y., bankruptcy court.

The White House expects that the 15 percent of investors who signed onto its first offer will immediately take up the improved deal, bringing the initial approval rate to 35 percent.

Beyond that, the official said the committee of major bondholders that already accepted the plan is working aggressively to round up support among the rest of the bondholders. Investors who agree to the deal risk losing out if it fails to attract enough other bondholders to satisfy the White House.

“It represents the best alternative for bondholders in the current difficult and dire situation,” said the Ad Hoc Committee of GM Bondholders. The group refused to identify individual members. Fidelity, Pimco and Franklin are among the major mutual funds that have said they own GM bonds.

While investors are still troubled that the White House and GM put the interests of unions over their own in the reorganization plan, the committee said the large bondholders came to the conclusion that the additional equity in GM “gives the bondholders the opportunity to recover a greater portion of their original investment.”

The investors said the new GM that emerges from bankruptcy would be substantially cleansed of its overwhelming debts, making stock investments in the company far more attractive. In particular, it said the Treasury’s willingness to let GM convert $70 billion of U.S. government loans into common stock would vastly improve GM’s balance sheet.

The administration already has given GM $19.4 billion in loans and is expected to give it another $50 billion as it works its way through bankruptcy.

Because of the conversion of U.S. loans into equity shares, the U.S. government would end up owning 72.5 percent of the company after the reorganization, with a union health care trust fund holding an additional 17.5 percent. The Canadian government also is expected to get a small share of the company for providing $9 billion in aid.

The value of the stock warrants given to investors and workers under the plan will not be known until GM emerges from bankruptcy and once again starts issuing stock as a public company. The administration official said it could take up to a year and a half to reach that point.

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