GM Bankruptcy Still Likely, Despite Bondholder Support

General Motors has won the support of some of its bondholders for a proposed restructuring that would give the bondholders a bigger stake in the reorganized company.

However, it's important to note that even with the bondholders on board, GM is still headed towards bankruptcy.

During Chrysler's earlier slide into bankruptcy, Chrysler sought support from its bondholders to avoid bankruptcy altogether. When creditors representing a minority of Chrysler's debt balked at the deal, President Obama singled them out for driving Chrysler into U.S. Bankruptcy Court.

GM is already past that point. To avoid bankruptcy, GM earlier was trying to get a minimum of 90 percent of its bondholders to accept equity in GM instead of cash. But that offer expired unsuccessfully May 26.

What's happened since then is that the U.S. Treasury brokered a proposed deal where the government will provide GM with more financial backing, and the bondholders potentially can get a bigger stake in the reorganized GM â€" up to 15 percent of the new company.

A group calling itself the "Ad Hoc Committee of GM Bondholders" said on May 28 it supports the new offer. "... Rejecting this offer in the expectation that the bondholders will do better in a litigated outcome was a risk the Committee is unwilling to take," the group said in a written statement.

What's different from Chrysler's situation is that agreement from the bondholders no longer is designed to head off a GM bankruptcy. On the contrary, part of the proposed deal for bondholders is that the bondholders agree not to contest the sale of GM's assets in U.S. Bankruptcy Court to a reconstituted GM.

That's how Chrysler aims to bring about its takeover by Fiat. Technically, Chrysler is seeking permission in U.S. Bankruptcy Court to sell its assets to "New Chrysler," a new business entity which is merged with Fiat.

Under the latest proposal, GM will seek to sell its assets to a "New GM," but first it has to file for bankruptcy protection, possibly June 1.