GM prepares for bankruptcy

By Kevin Krolicki and David Bailey

DETROIT (Reuters) - General Motors <GM.N> won a cost-cutting deal from its Canadian labour union on Friday, part of a package of concessions the automaker is expected to take into a federal bankruptcy court by the end of this month in a showdown with its bondholders.

GM's tentative agreement with the Canadian Auto Workers union comes a day after the embattled automaker won parallel concessions from its major union, the United Auto Workers.

The deals to cut operating costs at GM's North American factories help clear the way for the automaker to be steered into bankruptcy with the backing of the Obama administration if a longshot attempt to win over bondholders fails.

GM has been kept in operation since the start of the year with more than $15 billion (9 billion pounds) in emergency federal loans and has said it will need billions of dollars in additional financing if it moves into bankruptcy.

"All of our discussions that we had, it's very likely that they will go into Chapter 11," said CAW President Ken Lewenza at a Toronto news conference to announce the union's tentative contract agreement with GM.

GM bondholders, who hold about $27 billion of the company's debt, have balked at the terms they have been offered which would give them a 10 percent stake in a restructured company.

A spokesman for a committee representing GM bondholders said institutional investors remained solidly opposed to that offer as unfair.

"It's been a universal no from the get-go," said Nevin Reilly, a spokesman for the committee. "Bondholders are being seen as speculative bad guys, but bondholders are investors, many of whom put their retirement money into GM."

GM faces a June 1 deadline to restructure its debt and operations and has said it could file for bankruptcy if it fails to get bondholders to agree to forgive some $24 billion of the amount they are owed.

Creditors and auto dealers have complained their rights have been ignored in the restructuring of both GM and its smaller rival Chrysler, which has been operating in bankruptcy since April 30.

STEAM-ROLLING THE CREDITORS?

Critics argue that the Obama administration has favoured the position of unionized auto workers and has run roughshod over claims from other creditors in the process.

But the U.S. government's strong direction of the Chrysler bankruptcy has moved the carmaker much faster towards a sale of its main business to Italy's Fiat than sceptics had suggested.

That transaction now appears on track for completion by the end of the month, a stunning achievement given the complexity of the Chrysler bankruptcy.

"There is a clear path to the sale going through. And the court is really trying to help that along," said Carren Shulman, a partner in the bankruptcy practice at Sheppard Mullin.

Under its deal with GM, the UAW agreed to change the payment terms on some $20 billion it is owed for a trust that will pay for retiree healthcare. In exchange, GM offered the union a 39 percent stake in a reorganized company.

Four Republican lawmakers complained to Treasury Secretary Timothy Geithner that the restructuring of GM subverts the rights of bondholders, according to a letter from the lawmakers obtained by Reuters on Friday.

The restructuring favours the claims of the United Auto Workers "over the rights and claims of the company's diverse group of bondholders, who collectively hold $7 billion more in General Motors debt than the UAW's health trust and are equal members of the creditor class," the lawmakers said.

"Bondholders must have a seat at the table during negotiations in how the company would be restructured," said the letter to Geithner from Representatives Jeb Hensarling, Eric Cantor, Mike Pence and Pete Sessions.

Austan Goolsbee, a member of the White House Council of Economic Advisers and the Obama administration's autos task force, said GM bondholders needed to recognise that they would have to sacrifice.

"You know the bondholders are going to have to take some haircut. What we've seen over past months is the bondholders in some cases holding out, thinking that the government will step in and bail out the car companies and we'll get paid off," Goolsbee told Reuters Television in an interview.

Goolsbee said he expected GM's restructuring efforts to run right up to the June 1 deadline but not beyond.

"Usually these things, and as you saw with Chrysler, go right up to the deadline," Goolsbee said.

The CAW's Lewenza said the Canadian union had been told that it needed to reach a new contract deal with GM urgently so that President Barack Obama could review the terms of the automaker's business plan.

Lewenza said he was told that Obama would need to see the GM business plan, which will include details of how many jobs it will cut, by the weekend.

"We wanted to be on President Obama's desk as part of the business plan moving forward," he said.

GM shares, which the automaker has warned could be worthless in bankruptcy, were down 34 cents or 17.7 percent at $1.58 on Friday afternoon on the New York Stock Exchange.

(Additional reporting by John McCrank in Toronto, Kevin Drawbaugh and John Crawley in Washington, Walden Siew, Tom Hals and Caroline Humer in New York, editing by Matthew Lewis)

Article Published: 22/05/2009