After weeks of speculation on Wall Street that General Motors Corp ("GM") would be unable to secure the 90% needed participation rate in swapping roughly $27.2 billion (face value) of unsecured debt into equity, GM officially confirmed this morning the exchange offer has failed, pushing GM inevitably closer to a Chapter 11 bankruptcy filing. Wall Street consensus is that a bankruptcy filing will be necessary and most likely by this Friday or Monday, June 1 (Obama’s deadline for a viability plan).
Initially announced on April 27, GM under the explicit pressure and watch of President Obama’s Auto Task Force, had hoped to exchange 225 shares of GM common stock for $1,000 bond par value, or approximately 10% of the new GM. Institutional investors on May 1 countered with its opinion of a fair debt/equity swap which would have given debt holders 58% of the new GM and control. The recent volatility of GM equity share pricing and the unknown share price of GM after the accompanying 100:1 reverse share split left investors (of which 20% are individual mom-and-pop investors) confused about value and ultimately upset.
Correspondingly, GM’s 7.2% 2011 unsecured notes have been trading in a range of 2.99 to 10 cents on the dollar since April 27 versus a price of 85 cents on the dollar a year ago, according to Trace, the bond-pricing service of the Financial Industry Regulatory Authority.
If GM succumbs to bankruptcy given its high debt level and deteriorating cashflow generation, industry-leading labor costs, and an unprecedented sales slump, analysts note that a GM bankruptcy would be the fourth largest in US history and the largest for an industrial company.
The Board of Directors is scheduled to meet later this week to determine the Company’s next corporate action.
GM directly employs 235,000 workers and supports a global automotive supplier and distribution ecosystem that employs thousands more. GM equity shares closed at $1.15, down 20.1%.