GM Still Needs a Bondholder Deal to Avoid Bankruptcy

Now for the hard part: General Motors still needs to achieve a deal with its bondholders to accept GM stock instead of cash for $24 billion worth of GM debt, to avoid a GM bankruptcy filing effective June 1.

GM cleared a significant hurdle on May 21, reaching a tentative with the UAW, to bring UAW wages in line with nonunion U.S. factories for Nissan, Honda and Toyota, and for the UAW to accept GM stock instead of cash, for GM's contributions to the independent trust that manages heathcare benefits for UAW members.

The UAW confirmed the tentative agreement with GM on May 21, but said the details would be released later. The U.S. Treasury Department, which is keeping GM on its feet with loans, also endorsed the agreement, according to the UAW.

The UAW argues that labor costs are only a small part of the problem for the domestic automakers, accounting for less than 10 percent of the price of the average new vehicle. That's probably true as far as it goes, but the big problem for both sides is the huge cost of supporting UAW retirees, who far outnumber active workers.

Rival Ford reached a similar agreement between Ford and the UAW in March. Chrysler also reached a deal between Chrysler and the UAW in late April, but was forced to file for bankruptcy protection anyway, when it couldn't get enough creditors to go along with a deal to write off most of their Chrysler debt.

That's the position GM finds itself in, with Treasury and the UAW on board, but creditors so far balking at a proposal that would wipe out $24 billion out of $27 billion in debt. GM needs bondholders representing 90 percent of its debt to go along, if Treasury is to approve GM's reorganization plan, short of bankruptcy.

One factor that's different since Chrysler went bankrupt is that GM's creditors can see the rough handling that Chrysler's dissident creditors experienced. When a minority of Chrysler's creditors refused to go along with a Treasury-brokered deal, President Obama personally dissed them as "speculators" in a national press conference, and blamed them for driving Chrysler into bankruptcy.

The group called itself Chrysler's "non-TARP" lenders, to distinguish themselves from creditors who had accepted bailout money from Treasury. Their last stand didn't last long, in light of the president's attitude and strong public disapproval.

GM's creditors might not want to end up like a similar speed bump on the road to GM's reorganization. GM President and CEO Fritz Henderson already warned them that if they don't accept GM's offer, they may end up with nothing. On the other hand, GM's creditors may feel like they don't have much to lose.

CHART: UAW