GM Bondholder Exchange Offering and Third Restructuring Plan

The plan also calls for the cancellation of the Pontiac brand, as well as for the more rapid exit of the Hummer, Saturn, and Saab brands from the U.S. market. According to the new plan, sales of Hummer, Saturn, and Saab vehicles will end in the United States with the conclusion of the 2009 model year. Pontiac sales will end with the conclusion of the 2010 model year, with the exception of the G8, which ends with MY2009. No Pontiac models will be re-badged for other divisions. GM will build its future strategy around four core brands; Chevrolet, GMC, Buick, and Cadillac. This will align GM's brand offerings and number of vehicle lines with the anticipated future GM market share, thus allowing adequate product development and marketing budgets for each model.

In terms of the proposed debt-to-equity swap with bondholders, we believe the terms required by Treasury all but insure that GM will face an in-court restructuring (bankruptcy) on June 1. The government requires that 90% of bondholders accept a debt-to-equity swap that converts $27 billion in bondholder debt to a 10% equity share in General Motors. This is a government-mandated offer. Under the plan, the government will receive a 50% equity share in GM in return for half the money it loaned to GM, while the UAW will receive a 39% equity share for half of GM's unfunded VEBA obligation. This will give the government the right to appoint all of GM's board of directors, as well as "to control the vote on substantially all matters brought for a stockholder vote." In order to be able to restructure out of court, 90% of GM's bondholders must accept this offer…highly unlikely with such a "one-sided" offer. To make matters worse, some bondholders have credit default swaps on their GM bonds that allow them to receive full face value for their bonds in the event of a GM bankruptcy. Accordingly, a GM bankruptcy by June 1 is all but assured.

While a bankruptcy theoretically will allow GM to rid itself of all undesirable debts and obligations, it also carries significant risk. While textbook theory tells us that rapid, pre-packaged bankruptcies are possible, with a company the size of GM, a truly rapid exit from bankruptcy is unlikely. In the event of a prolonged bankruptcy, supplier failures will occur, potentially halting production at Ford and some transplants with the attendant collateral impact on the already weak economy. IHS Global Insight still maintains that a GM restructuring outside of bankruptcy is the safest route. But the probability of that happening appears to have all but disappeared.