- 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.

Once GM goes public again, investors could cash in half their warrants when GM’s market value reaches $15 billion, and cash in the other half when the company’s capitalization reaches $30 billion.

GM’s market value last exceeded $30 billion in January 2004, according to Bloomberg data. At Thursday’s closing stock price of $1.12 per share, GM’s market value was $702 million.

The sweetened offer raised a slight possibility that GM could avoid going into bankruptcy, should an overwhelming majority of bondholders approve the plan. But given some vocal holdouts among the bondholders, bankruptcy was the most probable outcome, officials said.

The Main Street bondholders group, which says it represents many of the 100,000 small investors who hold about 20 percent of the GM bonds, still opposes the GM reorganization, even with the sweetened deal for bondholders.

The group, which is affiliated with the conservative 60-Plus Association, a seniors group, cited the “gross unfairness in giving unions an estimated five times more dollar value per claim than the small bondholders.”

The group estimated that under the new offer, unions would reap 66 percent of their original claims against GM, while bondholders would receive only 13 percent, assuming GM’s market value reaches $25 billion.

Separately, GM’s vice chairman, Robert A. Lutz, dismissed charges Thursday that the White House’s goal is to control GM, the largest U.S. car manufacturer.

“They absolutely don’t want that,” he told the Automotive Press Association in Detroit.

“They want to revitalize the American automobile industry. Their number one goal is to make us successful. … There finally is a realization that our country cannot remain economically strong and militarily strong and have a global impact if it’s not backed up by wealth-producing industries.”

Mr. Lutz added that he is optimistic that GM will quickly return to health and resume its role as a leading blue-chip American company after the bankruptcy reorganization.

“The new GM will be smaller, but we will be a powerhouse,” he said. “The U.S. government wants its money back, and our plan is to pay it back as quickly as possible.”

• William Ehart contributed to this story.

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