GM bondholders beg for a seat at the table

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General Motors Corp.’s bondholders know they’re likely to become stockholders, whether the company reorganizes in or out of bankruptcy.

The question is whether the new stock they’d get would have any lasting value.

In that sense, the investors who own nearly $28 billion of GM’s bonds are on the same page as the Obama administration: They both want a GM reorganization that results in a viable company.

But the bond investors say they’re still on the outside looking in: They say they’ve largely been closed out of discussions about what to do with the auto giant.

‘We have been very disappointed that the government and the company have had virtually no real dialogue with bondholders while designing the proposed restructuring plan,’ the ad hoc committee of bondholders said in a statement today.

The members of the committee haven’t made their names public. But Bloomberg News data show that some of major holders of GM debt at the end of last year included Capital Research and Management, which manages the Los Angeles-based American Funds mutual fund group; Fidelity Management in Boston; and Franklin Advisers, the San Mateo, Calif.-based manager of the Franklin funds.

Add to that list an unknown number of ‘vulture’ investors who have picked up GM’s debt on the cheap in recent months.

GM’s bonds now mostly trade for between 10 cents and 30 cents on the dollar, depending on the issue.

The previous company proposal on the table was for debt holders to exchange two-thirds of their bonds for new equity in GM, and get cash and new debt for the remaining third.

Investors balked at that exchange because ‘they didn’t believe GM had a viable plan that would ensure that the equity they receive will be worth something eventually,’ said Shelly Lombard, senior high yield analyst at Gimme Credit, an independent research service on corporate bonds.

‘And if GM still ended up filing bankruptcy after the bondholders had converted their bonds into equity, as holders of equity instead of debt, they would be last in line for any recovery and would have little if any negotiating leverage,’ she noted.

Now there’s a new proposal that would force an even bigger haircut on bondholders: They would get cash and new debt for just one-quarter of their bonds, and an equity stake for the rest.

From Reuters:

The bondholders are in the same pickle as before: The more equity they take, the greater the risk of a total loss if GM eventually collapses despite any restructuring. At the same time, Obama has made clear that he won’t let GM ‘vanish.’ If that’s so, the bondholders may have the advantage in playing for time -- and a better deal.

As for what would constitute a reasonable debt level for GM, Sean Egan, head of bond rating firm Egan-Jones Ratings Co., says he thinks it’s a joke to talk about converting any of GM’s current debt into new debt.

Given its collapsing sales, he said, ‘GM can’t support any debt service to speak of.’

-- Tom Petruno