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GM has until Monday to complete a government-ordered
restructuring that includes debt reduction, labor cost cuts and
plant closures. But a Chapter 11 reorganization is likely after the
company said its offer to exchange $27 billion in unsecured debt
for 10 percent of the company's stock had failed. GM has received
$19.4 billion in federal loans.


      The automaker said its board will meet to decide its next step.


      "The principal amount of notes tendered was substantially less
than the amount required by GM to satisfy the debt reduction
requirement under its loan agreements with the U.S. Department of
the Treasury," GM said in a statement issued Wednesday.

      The Obama administration has said it would only provide more
funds if 90 percent of the bondholders, as well as unionized
workers, agreed to concessions that substantially reduced GM's
costs.

      GM also said it canceled meetings set for Wednesday with holders
of notes that were not sold in U.S. dollars. The statement said the
meetings were to discuss amendments to the debt-for-equity offers,
but it did not specify what the amendments were.

      There was a small hope Tuesday that GM could avoid a bankruptcy
filing when the United Auto Workers union disclosed that it would
take a 20 percent stake in GM - down from the original plan of 39
percent. That seemingly freed 19 percent of the Detroit-based
company's shares to sweeten the pot for its recalcitrant
bondholders.

      But because the bondholder deal did not go through, the equity
freed by the UAW deal now apparently will go to the U.S.
government, which may have to commit billions more for GM's
restructuring in court.

      The government's stake in the company originally was to be 50
percent, according to GM's regulatory filings. But it now could be
as high as 69 percent. The Canadian government also could get
equity for up to $8 billion in aid for the automaker.

      Such an arrangement would leave bondholders back where they
started - and a Chapter 11 filing all but certain. The deadline for
GM's bondholders to tender their debt was midnight Tuesday.

      Meanwhile, crosstown rival Chrysler LLC heads to court Wednesday
to ask a bankruptcy judge for permission to sell the bulk of its
assets to a group headed by Italy's Fiat Group SpA in hopes of
saving itself from liquidation. Attorneys for Chrysler maintain
that the Fiat deal is the company's only hope to avoid being sold
piece by piece, but car dealers, bondholders, former employees and
others are protesting what they see as the government speeding
Chrysler through the bankruptcy process without regard for certain
creditors.

      Chrysler filed for bankruptcy protection April 30, after the
government ended talks with a group of holdout bondholders.

      Automakers worldwide are struggling as the global recession has
reduced demand for new vehicles. But GM and Chrysler have been
particularly hobbled by promises to cover the health and pension
costs of tens of thousands of unionized retirees - along with
recent record-high gasoline prices that reduced demand for their
low-mileage trucks and SUVs.

      The UAW disclosed Tuesday it agreed to take a much smaller 17.5
percent stake in GM, plus a warrant for an added 2.5 percent stake
to partially fund the $20 billion that GM must put into a trust
that will start paying retiree health care costs next year.

      In exchange for agreeing to a lower equity ownership stake, GM
promised the union $6.5 billion of preferred shares that pay 9
percent interest, plus a $2.5 billion note. The union, facing the
possibility that it may not be able to quickly sell GM shares to
fund its trust, preferred the certainty of the $585 million annual
dividend that accompanies the preferred shares.

      The remaining $10 billion will come from health care trust funds
that GM already has set up. The trust will get a seat on GM's board
as well, although it will have to vote at the direction of GM's
other independent directors. The concession deal, on which roughly
61,000 workers will vote by Thursday, also froze wages and cut
retiree health care benefits, performance bonuses and
cost-of-living raises.


      When GM announced its debt exchange last month, the company
offered bondholders 225 shares of common stock for every $1,000 in
debt - or a 10 percent stake in the restructured company. In
addition to the UAW's share, the federal government was to take 50
percent for exchanging a combined $20 billion of their debt to
equity. Current stockholders would end up owning just 1 percent of
the company.

      A committee representing GM's biggest bondholders - mostly big
banks and other institutional investors - has opposed the
debt-for-equity swap from the start.

      Smaller, "retail" bondholders - individual investors like
retirees and families - have also railed against the terms of the
exchange. Both groups say the offer gives them too small a stake
for the amount they are owed.

      GM had said previously that the government was preventing it
from offering bondholders more than 10 percent of the restructured
company.

      Some analysts said GM's bondholders may be holding out for
better terms in bankruptcy. Stephen Lubben, a law professor at
Seton Hall University, said unsecured creditors like bondholders
often recover 40 percent of their investment in bankruptcy.

      "They may not do much better, but they can't do any worse," he
said.

      Another factor complicating the decision of GM's bondholders:
Many large investors hold insurance policies on their bonds known
as credit default swaps. Such policies would reimburse bondholders
in the event of a "credit event" like a bankruptcy filing.

      Investors who hold credit default swaps on GM debt stand to make
about $2.33 billion if the insurance contracts are triggered,
according to the Depository Trust & Clearing Corp.

      Some believe the debtholder offer was doomed from the start.
It's unclear how many of the thousands of individual and
institutional bondholders have participated in the exchange, but
analysts speculated that number was low.

      If GM heads into bankruptcy, the chain of events would prove
similar to what Chrysler faced one month ago. In that case, four
banks holding 70 percent of Chrysler's $6.9 billion secured debt
agreed to take $2 billion in cash, but a collection of hedge funds
refused to budge, sending the automaker into bankruptcy protection.


      However, the two cases are different in important ways. GM's
bondholders are unsecured, meaning their debt isn't backed by hard
assets like factories and property and are therefore likely to see
a smaller recovery in bankruptcy. They are also more diverse and
tougher to organize, ranging from big banks to hedge funds to
mom-and-pop investors.
      

Gallery

Business and Economic News

A General Motors Corp. bankruptcy filing seemed
inevitable after a rebellion by its bondholders forced it to
withdraw on Wednesday a plan to swap bond debt for company stock.

GM says bondholder offer fails; bankruptcy likely

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