EXCLUSIVE-UPDATE 3-GM creditor cracks show as bankruptcy looms

(Recasts lead, adds background, updates prices)
By Walden Siew
NEW YORK, April 14 (Reuters) - The risk of a General Motors
Corp bankruptcy is rising, causing bondholders to pursue
independent strategies to protect their interests if GM's
survival battle moves to bankruptcy court, two sources close to
the government talks with GM said on Tuesday.
The Obama administration's auto task force led by Steven
Rattner is in its second week of talks in Detroit in an effort
to revamp GM's restructuring plan and wrest concessions from
bondholders and labor, and is preparing a reduced term sheet
for GM bondholders for about $28 billion of unsecured debt.
Until now, a 10-member bondholder committee has shown a
united front, but cracks may be starting to show, leading to
independent bankruptcy strategies, according to two sources
familiar with the group.
With about 45 days for GM to present new restructuring
plans before the government's June 1 deadline, creditors are
beginning to shift tactics to prepare for a possible Chapter 11
filing.
GM creditors specifically have expressed frustration over
the lack of direct communication from the U.S. government or
from GM in their talks.
"Bankruptcy court is a big unknown, and saying that we'll
be in and out within two months doesn't sit right," said one
person close to the bondholder committee, referring to the
"surgical bankruptcy" scenario U.S. officials have described as
an option for the automaker.
At least one large bondholder is preparing for potential
bankruptcy by reviewing which courts may be most favorable to
bondholders, and has ruled out the Eastern District of Michigan
as being more favorable to the United Auto Workers union,
according to a second source familiar with the talks.
The perception is that GM and the union would have a home
court advantage in Michigan, and that the issue may draw
protests in Detroit and enflame emotional confrontations, as
opposed to a potential filing in New York or Delaware, that
person said.
"The government seems on track to direct this to a
controlled bankruptcy," said Shelly Lombard, senior high-yield
analyst with research firm Gimme Credit headquartered in New
York. "The key question is how can bondholders extract value.
They don't have a lot of leverage or options other than
lawsuits."
GM bonds were the second most actively traded in the
high-yield bond market, with GM's 8.375 percent notes due in
2033 dropping almost 1 cent on the dollar on Tuesday to 9
cents, yielding more than 91 percent, according to MarketAxess
data. They traded as high as 20 cents last month.
In negotiations with bondholders, GM last month offered 8
cents cash on the dollar, 16 cents on the dollar in new
unsecured debt, and a 90 percent stake in the automaker,
according to one person who saw the term sheet.
A new offer may include no cash, no new debt and perhaps as
little as 10 percent equity in the company, which may amount to
almost zero recovery value for bondholders, Lombard said.
"These investors are starting to consult advisers on their
own, but ultimately in a capital structure bondholders can
probably cut a better deal as a group," she said.
GM already faces a lawsuit in Canada from unsecured
bondholders over dividends GM paid from a Nova Scotia unit last
May to its U.S. operations, according to court documents.
Those bondholders claim the company wrongfully pulled
around $600 million from the Canadian subsidiary because
company officials should have known the U.S. business was near
insolvency, the documents said.
More legal battles are likely, according to Lombard and
bondholders.
"The goal is to have an honest negotiation and that's what
we're holding out for," one source said, who declined to be
named due to the confidential nature of the negotiations. "An
out-of-court scenario is becoming less and less likely with
each passing day."
GM's shares, which traded above $24 a year ago, rose 4
percent on Tuesday to $1.78.
(Editing by Leslie Adler)
((walden.siew@thomsonreuters.com; +1-646-223-6333; Reuters
Messaging: walden.siew.reuters.com@reuters.net))
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Keywords: GM BONDHOLDERS/SPLIT

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