GM Offers Bondholders Stock Instead of Cash -- Or Else

Under General Motors CEO Fritz Henderson, bankruptcy has gone from unmentionable to a bargaining chip.

GM today offered its bondholders shares of stock instead of cash, for about $27 billion worth of bonds. The net effect would be to reduce GM's debt by about $24 billion, Henderson said.

The upshot is, unless bondholders representing at least 90 percent of GM's debt agree to the swap by May 26, GM will seek bankruptcy protection, Henderson said in a press conference.

In a letter to bondholders that was distributed today as part of an SEC filing, GM warns that if bondholders don't accept the swap, the bondholders could get less than GM is offering today. Potentially, bondholders could get nothing, or "no consideration at all for your GM notes," the letter said.

It seems longer, but it's only been a month since the U.S. Treasury's auto task force dismissed former GM CEO Rick Wagoner. Wagoner presided over the last several years of GM's decline. His other sin was that he primly refused until the last moment even to publicly consider a bankruptcy filing, despite the obvious writing on the wall.

In contrast, Henderson said again and again today that he is a realist. Without saying so, Henderson also made it clear that GM is ready and willing to use the threat of bankruptcy as a lever to get its bondholders to go along.

"I'm a believer in dealing with reality," Henderson said. "None of us like the situation we're in, but it's our job to do something about it."

A key part of GM's new reality is that Henderson said GM's latest plan filed today makes a bankruptcy filing by GM even more likely than before. Henderson said that's because GM's bond exchange offer requires such a high percentage of participation by bondholders to succeed.

"The bond exchange needs to be successful for us to avoid bankruptcy," he said. "Ninety percent -- it's not impossible but it's a tough task," Henderson said.

That's true. It's also true that Henderson refused in so many words to recommend a course of action to the bondholders one way or the other. But it's also clear that the threat of bankruptcy could be a big stick in GM's hand, to get the bondholders to accept stock instead of cash, or risk getting nothing.