Wall Street Journal

For GM Bondholders, Time Is a Weapon

President Obama delivered a powerful warning to General Motors' unions and bondholders, suggesting that he was prepared to push the company into bankruptcy to force them to accept serious cuts. Now the great game of chicken begins. Does he really mean it?

A bankruptcy would force bondholders to take big losses on $29 billion of unsecured debt. But that doesn't mean the bondholders will quietly accept their fates. In many cases, these are the same investors who won a big victory over the government in the case of GMAC, the auto maker's finance arm, just three months ago.

The bondholders' biggest weapon is time. That is how they won the GMAC battle and that is how they can foil the Obama administration's expectations of a "quick rinse" through bankruptcy court. If the bondholders don't agree to the government's terms before a filing, GM could be mired in an old-fashioned bankruptcy slog. Given the size of GM's liabilities, $177 billion at year-end, it could be an epic one.

Mr. Obama's speech showed the tensions of speaking to two different constituencies at once. His first audience was clearly creditors and labor, with whom he spoke passionately about making "hard choices," brandishing the word "bankruptcy." The second was prospective car buyers, for whom Mr. Obama needed to show that a bankruptcy filing would be short and effective.

The execution looks to be harder than the rhetoric. The shortest period for the emergence of a large "prepackaged" bankruptcy, in which all parties agree to a deal prior to a filing, was the nine-month process used by telecom firm NTL Inc., according Bankruptcydata.com. And that was a relatively simple case of a healthy company that took on too much debt. There have been only three other prepackaged bankruptcies of companies with more than $10 billion in assets, with each of those cases lasting an average of seven months.

If creditors don't agree to the terms of the deal before a bankruptcy filing, the wait gets much longer. Kmart Corp. spent 15 months in court, while United Airlines parent UAL Corp. took more than three years.

"It all depends on how much agreement you get before you file," said one bankruptcy attorney involved in the auto industry. "A company this vast, you could legitimately question whether they could get it."

The government's best cudgel isn't just pushing the company into bankruptcy proceedings, but withholding the financing needed to keep GM afloat in a bankruptcy process. That would be tantamount to liquidation, a worst-case scenario for bondholders. But Mr. Obama showed his hand when he said, "we will not let our auto industry simply vanish."

Bondholders can gain more confidence by their successful battle over the government's $6 billion rescue of GMAC. That bailout went largely unnoticed in those last, chaotic days of 2008.

At the time, GMAC was rushing to convert to a bank-holding company, which would allow it access to the Treasury's Troubled Asset Relief Program. The Federal Reserve set a number of conditions along the way. Chief among them was that 75% of existing bondholders would agree to take a loss by tendering into a new bond plan. The hope was to lessen GMAC's indebtedness and improve its capital, much as is the case with GM.

Only about 59% of bonds were tendered in the final flurry in late December. The Fed's board waived GMAC through anyway, explaining its decision "in light of unusual and exigent circumstances."

That set an uncomfortable negotiating precedent: The Feds fold.

The bondholders' first volley Monday wasn't surprising. They expressed disappointment that they were left out of the planning for GM's restructuring. While Mr. Obama's stance was meant to shake up the bondholders, he will have to get tougher to make sure the quick rinse doesn't become a long slog.

Well considering that they would be wiped out largely in bankruptcy, they should be ready to deal I would think.