Is this finally an offer GM bondholders can't refuse?

With part carrot and a larger stick the United States Treasury Department has put a new deal on the table for the GM bondholders who refused to go along with a debt-for-equity swap that expired yesterday.

Treasury now says accept the 10% stake in a reorganized GM and eventually another 15% of the new company will be offered by way of stock warrants. This is either a modest or generous peace offering, depending on your viewpoint.

The Treasury revised deal is clearly designed to head off bondholder objections to a GM reorganization, which will help streamline a bankruptcy filing that is now likely next Monday. For the second day now Chrysler bondholders are arguing in U.S. Bankruptcy Court in New York against a similar reorganization proposal and sale of good assets to Fiat, while Old Chrysler LLC is dissolved and bondholders and other debtors divide what’s left. More than 300 objections to the sale have been filed.

The GM reorganization involves the sale of substantially all of its assets under section 363(b) of the U.S. Bankruptcy Code, which allows a New GM to emerge with a healthy balance sheet, while the Old General Motors Corporation is dissolved and its creditors paid off from what little remains.

Under the GM  reorganization now proposed U.S. taxpayers would own 72.5% of New GM.

The revise bondholder deal comes in two parts: Old GM (Warrant 1) receives warrants to acquire newly issued shares of New GM equal to 7.5% of New GM common equity outstanding at closing. These warrants are exercisable at any time prior to the seventh anniversary of issuance, with an exercise price set at the share price that would equate to an aggregate equity value of $15 billion based on the shares outstanding at closing, fully diluted for the issuance of such warrants.

Then there’s Old GM Warrant 2 for another 7.5% of New GM common equity outstanding at closing, exercisable at any time prior to the tenth anniversary of issuance. The exercise price is set at the share price that would equate to an aggregate equity value of $30 billion based on the shares outstanding at closing, fully diluted for the issuance of such warrants. 

Treasury did not immediately respond to TDB’s request for comment and elaboration. It is not clear what level of debt swap would be acceptable to Treasury, although the SEC filing says it is looking for 50%. It is likely that Treasury will proceed with a bankruptcy filing no matter how many bondholders agree, leaving GM to defend its plan  to objecting bondholders in court.

As previously announced, GM’s exchange offers for $27.2 billion of its unsecured public notes expired on May 26, 2009, and therefore the  exchange offers will not be consummated. GM’s Board of Directors is now discussing GM’s next steps. Only 15% of Bondholders agreed to that deal, which would have given them 10% of the company.

GM, not surprisingly, is in favor of the new deal, saying in a statement: “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. GM appreciates the unwavering support of the U.S. Treasury and the President’s Task Force on Autos and thanks the unofficial committee of bondholders for their support of the proposal.”

However, GM says that only 20% of the bondholders have informally indicated that they will go along with the new deal, far below the 90% thought to be required by Treasury.

“We have been informed by the advisors to the unofficial committee of unsecured GM Noteholders, Houlihan Lokey Howard & Zukin Capital, Incorporated, and Paul, Weiss, Rifkind, Wharton & Garrison LLP, that the unofficial committee and other large noteholders (who collectively hold approximately 20% in aggregate principal amount of the Notes) support the economic terms of the Proposal,” GM said in a statement.