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GM Bondholders Shun Offer, Setting Stage for Bankruptcy

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GM Bondholders Shun Offer, Setting Stage for Bankruptcy

General Motors unveiled a tentative labor agreement with the United Auto Workers, though bondholders shunned a proposed debt-to-equity offering, setting the stage for a bankruptcy filing by the troubled auto maker.

For GM to stay out of bankruptcy protection, holders of 90 percent of its bonds must agree to exchange $27 billion in debt for a 10 percent stake in the company. But as a midnight deadline for the deal approached, it appeared that the swap was likely to fail.

Analysts have said bondholders will not want to exchange their massive debt for such a small stake. GM has said in a regulatory filing that it may extend the bond exchange offer, but it is up against a government-imposed June 1 deadline.

A spokesman for GM's ad hoc bondholder committee declined to comment on prospects for approval of the deal. The largest US automaker had no comment on the bond exchange, saying it would disclose the results Wednesday morning.

"The bondholders are not interested at all," one source told Reuters. "They'd rather fight it out in bankruptcy court than do anything at this point."

The White House, meanwhile, said GM's efforts to cut debt and restructure its business are expected to continue until the June 1 deadline.

White House spokesman Robert Gibbs told reporters that "a lot of stakeholders are making sacrifices" and believes the process will run its course before any determination is made on a Chapter 11 filing by the automaker.

GM advanced toward meeting another requirement to stay out of bankruptcy and continue to receive government aid, a new deal with its labor force. Details of a tentative agreement between GM, the UAW union and the government were released Tuesday.

The agreement would give the UAW 17.5 percent of GM's common stock, $6.5 billion of preferred shares and $2.5 billion to fund a trust to cover retiree health benefits.

There will be more buyout offers for many of GM's remaining manufacturing workers. Union members will vote on the proposal Wednesday and Thursday.

On Monday, the Canadian Auto Workers approved GM wage cuts and other concessions. GM's proposal has far bigger cost cuts than the labor agreement automaker Ford Motor reached in February.

GM's shares have been volatile in recent months as auto sales crumbled and the Detroit automaker was forced to terminate contracts with dealerships, close down plants and lay off tens of thousands of workers. The stock hit $1 on May 13, its lowest point since 1933.

On Tuesday, GM shares dropped as low as $1.12 but later reached as high as $1.84, up 41 cents or 29 percent from Friday's close. The shares were down 5 cents, or 3.5 percent, to $1.38 in late afternoon trading.

GM, which has lost $82 billion in the past four years and has received $19.4 billion in government funding since the beginning of this year, has been struggling to cut costs and reduce debt to continue to receive more government aid.

The company said on Friday that it expected to need another $7.6 billion from the U.S Treasury after June 1.

GM has said it is unlikely to make a $1 billion debt payment due June 1, a day after its government-imposed deadline to cut enough costs or face bankruptcy.

Current shareholders would be left with just 1 percent of a restructured company.

Representatives of GM bondholders, like the secured debt holders in the Chrysler bankruptcy, have argued that the Obama administration's autos task force is rewriting the rules of corporate reorganization on the fly, in a way that favors the union over other creditors.

Bondholders have complained that the union, which was offered 39 percent of a new GM, was getting an unfairly rich payout compared with other unsecured creditors.

"It's a slap in the face," said James Yarbrough, a retired accountant from Plano, Texas, referring to the 10 percent equity stake offer.

Yarbrough has invested $158,000 in GM bonds, which he first bought in 1994. He regrets buying more bonds in 2008, when he thought GM was about to make a turnaround.

"This will probably force me to sell my house," Yarbrough said. "I'm going to fight until the end."

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An as expected reply from the bond holders.

I love the guy that says he will have to sell his house and fight to get what he has coming to him, $158,000 worth of bonds. Sorry but if he has to sell his house to fight for that small amount then he did a terrible job investing for himself. Probably this is like his 8th or 9th house. Bonds are no differant than going to Las Vegas. A gamble you play and the results might not always work out in your favor.

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An as expected reply from the bond holders.

I love the guy that says he will have to sell his house and fight to get what he has coming to him, $158,000 worth of bonds. Sorry but if he has to sell his house to fight for that small amount then he did a terrible job investing for himself. Probably this is like his 8th or 9th house. Bonds are no differant than going to Las Vegas. A gamble you play and the results might not always work out in your favor.

I dont think he is so much complaining about not getting face value, i think he is complaining that the government intervention is unfairly distributing the companies assets.

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