GM's latest plan would cede control to U.S.

Bondholders remain stumbling block to deal

David Shepardson / Detroit News Washington Bureau

Washington -- The U.S. Treasury Department would own a majority of General Motors Corp. and have the right to appoint all of its directors, under the company's turnaround plan unveiled Monday -- the latest sign of the government's growing role in the automaker's restructuring.

The administration also told the Detroit automaker it wouldn't support giving bondholders any more than 10 percent equity in the company.

That hard-line offer could be a major factor in bondholders rejecting the exchange and forcing GM into bankruptcy, analysts said. The Obama administration has boosted the percentage of debt it wants the automaker to write off to at least 90 percent, up from two-thirds.

GM's bondholders came out swinging, saying the company's offer of just 10 percent equity in exchange for $27.2 billion in bonds was inadequate.

"This offer demonstrates that the company and the auto task force, unfortunately, are pinning their hopes on an extremely risky and legally questionable turnaround in bankruptcy court, instead of engaging its lenders and workers in the very type of negotiations that could avoid such a fate," an ad hoc committee of GM's bondholders said.

Shelly Lombard from Gimme Credit, an independent bond research firm, wrote in a research note that "the exchange offer that General Motors announced this morning must look to bondholders like something Tony Soprano dreamed up. It's pretty heavy-handed and doesn't offer much in the way of options."

The Obama administration, which has been heavily involved in GM's restructuring since rejecting its viability plan in late March, said it hadn't agreed to GM's plan ahead of a June 1 federal deadline and brushed off suggestions it wanted to run GM's day-to-day affairs. "It is not our desire to either own or run one of the auto companies," White House spokesman Robert Gibbs said.

Task force weighs in

But the administration has been flexing its muscles for months, pushing out GM Chairman and CEO Rick Wagoner, setting up shop in a suite of offices in the Renaissance Center's 300 Tower and ordering GM to replace a majority of directors.

The task force has weighed in on every aspect of the business, including GM's brand strategy. On Monday, GM reversed course and agreed to kill its 83-year-old Pontiac brand by next year; it previously said it would be a niche brand of one or two vehicles.

It also moved ahead to this year plans to end production of its Saturn brand cars.

The bondholder offer remains a significant hurdle, though.

Barclay Capital auto analyst Brian Johnson said the bondholder offer likely will fail because bondholders would recover up to 5 cents on the dollar compared to a 50-cent to 60-cent recovery for the United Auto Workers union, which will own up to 39 percent of GM with the deal it has agreed to with the company.

"Unless the offer is revised before May 8, GM could potentially file for (Chapter 11) protection by the end of next month," Johnson wrote.

Under GM's revised plan, the U.S. government would have the right to call all of the shots -- as part of its $15.4 billion in loans to GM to date. GM said it expects to receive another $11.6 billion in loans from the government by Dec. 31 -- a big infusion of taxpayer money that might give the Obama administration a greater incentive to take a more hands-on role.

"As a result of its ownership of GM common stock, the U.S. Treasury will be able to elect all of our directors and to control the vote on substantially all matters brought for a stockholder vote," GM said in a statement. "The U.S. Treasury will be able to exercise significant influence and control over our business if it elects to do so."

Cuts announced

GM announced Monday that it would cut 21,000 hourly jobs and close 13 plants by the end of next year, part of the restructuring needed for the company to get more aid. That news prompted some to call on the auto task force to do more for workers.

"Protection of jobs in the United States ... will be a significant factor in the Treasury's reaction to the GM proposal," said Sen. Carl Levin, D-Detroit, adding that the auto task force "will consider the views of the UAW in their evaluation."

The task force will have the power to approve which GM plants will be closed. GM has said it plans to start naming those plants in the next few weeks.

David Brophy, a business professor at the University of Michigan, said the Treasury Department "will have complete control" but he said "the last thing the task force guys want is to have responsibility for the auto companies.

"You don't fire the guy who knows how to milk the cow if you don't know how to milk a cow," Brophy said.

Veto power exercised

The Treasury Department already has veto power over any transaction of $100 million or more at GM and other significant transactions, and it has exercised some of that control. The Treasury objected to a GM deal with Delphi Corp. last month.

The Treasury could opt to select GM's managers and set their pay, business strategy and relationship with employees, unions and others, GM said. The auto task force is already consulted on all major decisions.

President Barack Obama has said the government doesn't want to run GM. "Let me be clear. The United States government has no interest in running GM. We have no intention of running GM," Obama said in a March 30 speech.

But now that the government is set to own a majority of GM, that may be difficult to avoid.

David Cole, chairman of the Center for Automotive Research in Ann Arbor, said the administration's role shouldn't be too hands-on. "If they are smart, it won't be a big role," he said. "I would see them trying to get out very quickly."

dshepardson@detnews.com (202) 662-8735