EXCLUSIVE - GM creditor cracks show as bankruptcy looms

By Walden Siew

NEW YORK (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.