Government May “Nationalize” GM by Swapping Debt for Equity

By Don Miller
Associate Editor
Money Morning

In a move that would effectively nationalize the country's largest automaker, the U.S. government is considering taking an equity stake in General Motors Corp. (GM) in exchange for part of the $13.4 billion it has already lent the company, Bloomberg News reported, citing people familiar with the matter.

Such a move would likely mean bondholders would get a smaller piece of a new company that would emerge in bankruptcy with most of GM's saleable assets. The bondholders, who own $27.5 billion in GM debt, had been offered 90% of the new entity's equity in an earlier settlement proposal. That debt is now trading for as little as 8 cents on the dollar.

"What the government is doing is stepping them down and easing the blow," Albert Angrisani, a turnaround executive who was assistant secretary of labor under President Ronald Reagan, told Bloomberg. By doing that, "they lessen the rights of the creditors in bankruptcy," he said.

GM has until June 1 to turn its business model around, and that involves putting out two major fires: First, convincing the bondholders to exchange the debt into GM equity, and secondly, convincing the United Automobile Workers' to make more concessions - the latter being more difficult without bondholders making a sacrifice.

Retirees owed health benefits would probably get more equity in the new company than bondholders, who would likely get only "a sliver," Bloomberg reported. GM has been negotiating to reduce the $20.4 billion it owes to a union-run health care fund.

The $13.4 billion in funding previously provided to GM came in the form of secured loans holding senior status to other bondholders, which may make it easier for GM to force a restructuring plan on other creditors. 

The equity stake idea surfaced on the heels of a report Sunday in The New York Times that the Treasury Department has told GM its goal is a speedy "surgical" bankruptcy, despite the company's effort to restructure outside of court.

One of the plans the Treasury is considering would involve creating a new company that would buy GM's better assets immediately after the bankruptcy filing. Bad assets would be left in the old company and liquidated, The Times reported.

A committee of bankers and other GM advisers are working to determine how much the restructured company might be worth in a debt-for-equity swap, anonymous sources told Bloomberg.

Banks and other creditors also have $6 billion in secured claims that would not be part of the debt-for-equity calculations.

While it is widely believed President Barack Obama favors bankruptcy as the most likely way for GM to become competitive, the government may prefer a quick sale of its stake to avoid criticism of what may be seen as a government takeover of private enterprise.

Critics have already accused the administration of teetering on the brink of socialism after the government took stakes in banks and insurance companies as part of its bailout of the financial industry. 

A government stake, "means you essentially have a nationalized General Motors until such time as the government sells off its equity to someone else, which won't happen for a while," said Gerald Meyers, a professor at the University of Michigan Ross School of Business and a former chairman of American Motors Corp. told Bloomberg.

"The problem is it's political. On the other hand, it's a cheap way for the good GM to keep going and probably solidify its strengths," he said.

Meanwhile, creditors of another struggling U.S. carmaker, Chrysler LLC, plan to make a counteroffer to the U.S. Treasury this week - possibly asking for equity in a firm combining Chrysler and Fiat S.p.A. (ADR: FIATY), Reuters reported.

The lenders, which include JPMorgan Chase & Co. (JPM), Citigroup Inc. (C), Goldman Sachs Group Inc. (GS) and Morgan Stanley (MS), were in talks with the government to reduce Chrysler's debt by swapping some of it out for equity, new debt or a lesser amount in cash.

The two auto companies have been in discussions about an alliance that could see Fiat take a stake in Chrysler by the end of April.

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