GM Bond: Not worth the paper it was printed on?

General Motors Corporation appears no closer to resolving a dispute with the company’s bondholders who feel they are being forced to make major concessions.  And the lack of a deal could push the automaker into bankruptcy, a group representing those bondholders warns.

“GM’s bondholders were not asked to participate in creating this framework,” the bondholders said, in a letter to Treasury Secretary Timothy Geithner, in which they expressed their frustration with the negotiations. “Others determined what the bondholders should sacrifice in order to restructure GM,” the letter said, referring to the terms established in the bridge loan documents signed by GM and the Bush administration back in December.

The $13.6 billion in bridge loans helped GM avert bankruptcy at the end of 2008.  But it also made clear that concessions were expected of all the company’s stakeholders, including its workers, who have already approved billions in givebacks.

The bondholder letter also expressed reservations about the restructuring plan that GM released in February.  “GM presented a five-year restructuring plan to the Treasury Department in which it outlined the steps it believes the company needs to take in order to become viable,” the letter noted, adding that, “While this plan is a step in the right direction, we are concerned that the company is putting too much faith in a near-term turnaround in the economy that would enable annual car and truck sales to reach previous levels.  We do not know if the plan would, in fact, keep the company out of bankruptcy,” the letter said.

“It appears a purely arbitrary decision was made in December as to what bondholders would receive.  All other parties involved in the restructuring process will walk away with far more,” the bondholders letter noted.  “It is unclear why it was decided that GM’s bondholders should bear the greatest risk here,” the letter added.

The bondholders are incensed that GM is apparently prepared to give the United Auto Workers 50 cents on the dollar for its obligations for theVoluntary Employee Benefit Association or VEBA, which is due to take over health care next year. However, bondholders will only get 33 cents per dollar for the face value of their debt instruments.

The bondholders have suggested instead that both the VEBA and bondholders receive the same amount of debt for equity in a restructured GM

Alan Reuther, the UAW’s legislative director, said in a letter to Congressional representatives last week the bondholders, many of them speculators, who purchased the debt for pennies on the dollar, are demanding payment at the expense of GM retirees.

So far they union has refused to accept less in cash on the VEBA issue while making other concessions to GM such as abolishing the jobs bank and eliminating holidays.

However, the committee representing the GM bondholders has warned that a failed debt-for-equity swap would tip the auto giant into bankruptcy “that would have dire consequences for the company, the tens of thousands of hard-working Americans that GM employs and the economy as a whole.”

A high stakes game of chicken is in process. We’ll see who blinks first.

In separate but related refinacing news, Ford Motor Credit Company says part of its cash tender for outstanding debt is already oversubscribed. Here bondholders are swapping debt for equity.

“We are very pleased with the results to date of our debt restructuring initiatives,” said Neil Schloss, Ford Treasurer.  “The cash tender offer by Ford Credit for Ford’s senior secured term loan debt has been oversubscribed, and the decision was made to increase the amount of cash used so Ford Credit could purchase additional term loan debt.

“In addition, the cash tender offer by Ford Credit for Ford’s unsecured, non-convertible notes has resulted in nearly $3.4 billion principal amount of notes being tendered so far.  With these tenders, we have taken significant steps towards reducing Ford’s long-term debt and strengthening our balance sheet,”  he said.

The oversubscribed portion of the debt include the $500 million cash tender offer for Ford Motor Co. senior secured term loan debt or the “Term Loan Debt” and the early tender results as of its previously announced $1.3 billion cash tender offer of “Notes Tender Offer” for Ford’s unsecured, non-convertible debt securities.

The Notes Tender Offer remains open until 9:00 a.m., EDT, on April 3, 2009.  In addition, Ford’s previously announced Conversion Offer for its 4.25% Senior Convertible Notes due December 15, 2036 remains open until 9:00 a.m. EDT, on April 3, 2009.

Ford Credit also increased the amount of cash it would use for the Term Loan Offer from $500 million to $1 billion.  This will allow Ford Credit to purchase $2.2 billion principal amount of Ford’s Term Loan Debt at a price of 47% of par. These distributions by Ford Credit are consistent with its previously announced plans to pay distributions to Ford of about $2 billion through 2010.

Approximately $3.4 billion of the principal amount of notes had been validly tendered, according to information provided by Global Bondholder Services Corporation, the Depositary and Information Agent.

The $3.4 billion principal tendered as of the early tender date will cost Ford $1.1 billion if those notes are all accepted for purchase and not prorated.