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Bondholders hold key to GM's future

Now we get to see how good General Motors Corp. executives are at high-stakes poker.

The beleaguered automaker unveiled its survival plan last week, but it won't do much good unless GM can convince its workers and bondholders that their pain still could lead to some gain.

The biggest challenge likely will be convincing GM's bondholders to accept about 30 cents on the dollar in new bonds and stock in exchange for the $27 billion investors had lent the automaker through previous bond sales, says Arthur Wheaton, director of labor studies at Cornell University's School of Industrial and Labor Relations in Buffalo.

That might be an even tougher sell than convincing the United Auto Workers union to let GM fund at least half of its $20 billion obligation to the new retiree health care trust with GM stock, rather than cash.

For both bondholders and the union, the trouble with accepting GM stock is that the shares already trade at on-the-brink-of-bankruptcy prices of less than $2 a share -- the lowest level in more than 70 years.

Issuing billions in additional shares to pay off bondholders and fund the health care trust will only dilute the stock further. And if GM goes bankrupt, the stock would be worthless.

Ultimately, Wheaton expects the UAW to go along with the plan, because not only is GM's survival at stake, but so are the remaining jobs of its members. GM's restructuring not only would whack another 16,000 hourly U.S. jobs, but the union also has tentatively agreed to speed up wage reductions and benefit cutbacks.

"The UAW, they've been making concessions left, right and center," Wheaton says. "They're realists. Take a few concessions or we won't have a job anymore."

The choice isn't as clear for GM's bondholders. If GM goes bankrupt, they'd be toward the front of the line of GM's creditors waiting to be repaid, while shareholders would be toward the back.

"They don't have a lot of wiggle room there," Wheaton says, with GM facing a March 31 deadline looming to conclude the negotiations with the union and the bondholders. "They have to have bankruptcy front and center as a major factor to get the bondholders to take action."

GM is playing the brinksmanship game, too. It wants to avoid bankruptcy at all costs, believing that buyers would avoid a bankrupt automaker's showrooms. Because private financing isn't available for such a huge bankruptcy, a government-backed reorganization could cost taxpayers anywhere from $36 billion to $103 billion, the automaker predicts.

To stay out of bankruptcy, though, GM needs to convince the federal government to pony up another $16.6 billion in loans -- after burning through more than $13 billion in financing in just three months. Without the additional loans, GM says it will run out of cash by the end of March.

Bruce Clark, a Moody's Investors Service analyst, thinks there's about a 70 percent chance that either GM or Chrysler ends up making a government-backed bankruptcy filing. He thinks the federal government may need to allow at least one of the automakers to fall into bankruptcy to speed up the necessary restructuring.

"There may be a degree of skepticism among creditors and other constituents that the government will actually allow any of the Detroit Three to file for bankruptcy," Clark said in a report.

GM's restructuring plan, which includes closing 2,100 dealerships, shutting 14 plants and either selling or phasing out brands like Saturn, Hummer and Saab, also hinges on getting Americans to start buying cars again.

"All these brand closings and dealer closings require a lot of cash," says Morningstar Inc. analyst David Whistson. "This cash is going to have to come from the American taxpayer."

e-mail: drobinson@buffnews.com

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