Obama Auto Team to Eye GM Loan-to-Equity Swap (Bankrupt Filings)

The U.S. government is considering taking an equity stake in a stripped-down General Motors Corp. in a swap for some of the $13.4 billion the carmaker owes the Treasury, people familiar with the matter said.

A government stake would be part of an effort to cut GM’s debt and improve its balance sheet as the carmaker approaches a June 1 deadline to come up with a plan to become viable, the people said. There would be a smaller stake for bondholders, who own $27.5 billion in GM debt, and who had been offered 90 percent of the new entity’s equity by the company.

“It’s hard to have negotiating leverage when the government and the public opinion is lined up against you,” said Richard Hahn, co-chair of the bankruptcy practice at Debevoise & Plimpton LLP, a New York law firm.

Bankers and other GM advisers are working to estimate how much a restructured company, consisting of only profitable GM assets, might be worth in a debt-for-equity swap, said the people, who declined to be named because discussions are private.

U.S. Treasury spokeswoman Jenni Engebretsen declined to comment. GM spokesman Randy Arickx declined to comment.

The government might favor a quick sale of its stake once the new entity began operating in a probable bankruptcy that would liquidate unprofitable assets and debt not wiped out in an equity exchange, one of the people said.

A speedy sale of the government’s GM stock would be designed to counter any criticisms that the administration had become socialist, after also taking stakes in banks and insurance companies as part of its bailout of the financial industry, the person said.

Retirees Get More

Retirees owed health benefits would probably get more equity in the new company than bondholders, who would likely get only “a sliver,” the person said.

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

By taking equity, the government would make it easier for GM to force a restructuring plan on all other creditors in a bankruptcy because the Treasury’s secured loans give it a senior status.

The automaker plans to create a new company with its best Brands, including Chevrolet and Cadillac, and plans to sell the new company eventually to pay stakeholders.

Obama View

President Barack Obama believes bankruptcy is the most likely way for GM to become a competitive automaker, people familiar with the matter said. The administration plans a public briefing at least a day ahead of the filing and as early as a week before to reduce any public apprehension or investor panic over the bankruptcy, said a person familiar with the auto task force’s thinking.

The Obama team will explain the government’s warranty program covering cars bought from a bankrupt automaker and assure stakeholders that the bankruptcy will be swift and “surgical,” the person said.

While GM has made preparations to file bankruptcy papers, it still has seven weeks to try to avoid that process by coming up with deeper cost and debt reductions than it proposed in a February bailout plan, the person said.