GM speeds towards bankruptcy

In the wake of this week's de-railing of talks over the future of Vauxhall and Opel in Europe, parent General Motors is today set to move towards bankruptcy. The key to the timing was the agreement of its bondholders to gain control over 25 per cent of the restructured entity after holding out for more than the initial 10 per cent offered.

The deal was reached by offering 'warrants' for an additional 15 per cent of equity, as long as a significant number of holders go along with the plan by tomorrow. So far 35 per cent have signed up and if not enough agree, they will have

to fight over the company's remaining assets in bankruptcy proceedings.

It is thought that the US government will provide over $30bn in funds to the automaker while it is in Chapter 11 bankruptcy, with the remainder to be met by the Canadian authorities. The bondholder agreement means that GM is likely to spend around three months being restructured - a shorter time than would have been the case if the wrangling had continued.

The new company will see its debt slashed to about $17bn, with the government gaining a 72.5 per cent stake for writing down $50bn in borrowings. In return, unprofitable units like Hummer will be sold off, models will be streamlined and staff pay will be cut after unions agreed to the changes. The plan replicates the restructuring being carried out at Chrysler, now owned by Italy's Fiat.

Meanwhile talks are set to resume over the fate of GM Europe in Berlin today after Wednesday's failure to come to an agreement.

WHAT THEY ARE SAYING
Lex, FT: "The quicker and less acrimonious the bankruptcy proceedings, the more bondholders’ equity stake may be worth when GM emerges in its less-leveraged, stripped-down form. GM’s unsecured creditors can now unite in savaging those lower down the legal food chain, such as dealers, while leaving current shareholders, who earlier stood to get a few morsels with a 1 per cent stake, absolutely nothing."

Opinion, Wall Street Journal: "After the likely bankruptcy filing in coming days, the Obama Administration will own America's largest car company. If the Administration runs GM according to the same political priorities it has displayed in negotiating its restructuring, do not expect the taxpayer financing to stop anytime soon."