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[h1]GM moves step closer to bankruptcy[/h1][h2]Company announces that few bondholders were interested in a plan to swap debt for stock. New ownership stakes take shape: U.S. to getnearly 70%

[h2]By Chris Isidore, CNNMoney.com senior writer[/h2]
[h2]Last Updated: May 27, 2009: 11:06 AM ET

NEW YORK (CNNMoney.com) -- General Motors said Wednesday that it has fallen far short of the bondholder support it needed for its proposeddebt-for-stock offer, virtually guaranteeing that the nation's largest automaker will be forced to file for bankruptcy court protection within the nextfive days.

The bondholders were not satisfied with the prospect of owning only 10% of the company when the U.S. government would own nearly 70% and aunion-controlled trust fund up to 20%.

The bondholders own $27 billion in corporate notes. GM (GM, Fortune500) needed owners of 90% of those bonds to accept stock in return for the debt in order to reduce its interest expenses to a moremanageable level.

But GM's announcement said that bondholders who took the company's offer were "substantially less than the amountrequired."

The company owes the bondholders $1 billion in interest payments on June 1 - money it says it does not have.

The company also faces a June 1 deadline to win concessions from its union, creditors and other parties or be forced into bankruptcy by theU.S. Treasury Department, which is funding GM's operations through direct federal help.

"The GM board of directors will be meeting to discuss GM's next steps in light of the expiration of the exchange offers," saidthe company's statement.

In another sign that a bankruptcy filing could come as soon as Friday, GM moved up the pay date for its U.S. employees this week.

Hourly employees represented by the United Auto Workers union were paid Wednesday, and salaried employees will be paid Thursday, said GMspokesman Chris Lee. Both normally would have been paid Friday.

"Obviously there's a lot of anxiety as we approach the June 1 deadline," said Lee. "We just moved the payroll up as a wayto reassure our employees that payroll will continue regardless of what takes place next week."

GM had previously announced that it would make about $2 billion in payments due to suppliers on Thursday, rather than waiting for thenormally scheduled payment on June 2. If the company files for bankruptcy, it would need court approval to make payments to employees and suppliers.

Lee said the early payroll payments should not be taken as an indication that the filing would come on Friday.

What next for bondholders?

The ad hoc committee of major bondholders had no immediate comment on the vote. The group, which includes major pension funds and mutualfunds that own large blocks of the bonds, had proposed the bondholders as a group receive 58% of the stock in GM, rather than the 10% being offered.

The major bondholders have also said they want to continue negotiating with Treasury's auto industry task force overseeing the federalbailout of GM and Chrysler LLC.

A source with knowledge of GM's restructuring discussions said Treasury is willing to hold negotiations up until June 1.

"We've said consistently that we were happy to talk to any stakeholder any time about anything," the source said."Recently there have been far more constructive and orderly conversations."

But the source added that Treasury believed the offer made to GM creditors, which would give them 225 shares of GM stock for every $1,000they are owed, is fair and equitable, and that it is not likely to be substantially increased. The 225 shares would be worth $324 based on Tuesday'sclosing price, although the value of these shares could be significantly less after a reorganization.

However, if GM does go into bankruptcy, the source said that Treasury believes the bondholders would likely get even less than what wasoffered.

"In any kind of liquidation scenario, they would get nothing or something unbelievably small," said the source.

It is estimated that about 20% of the $27 billion in debt, between $5 billion and $6 billion, is held by individual investors who bought thebonds for the steady revenue stream they provided. Most of the bonds pay better than 7% interest, and those that were purchased at a discount since GM debt wasdowngraded to junk bond status in 2005 pay an even better return.

GM stock does not pay any dividend and will not do so for the foreseeable future. Stock is also a riskier investment than bonds becausestockholders are certain to be wiped out if there is a bankruptcy filing, while bondholders can hope that they will recover some of their investment incourt.

But rating agency Standard & Poor's estimates that the bondholders, whose debt is not secured by specific company assets, will getbetween 0% and 10% of their investment back in bankruptcy court.

The stock being offered bondholders would be equal to only about 10% of the company. GM's stated plan is for the government and aunion-controlled trust fund to own 89% of the company between them.

The UAW disclosed to its local presidents Tuesday that it has agreed to accept 17.5% of GM's common stock to cover future retiree healthcare costs, as well as warrants for an additional 2.5% that give the trust fund the right to buy shares at a very low price.

Previously, many had expected the union to control nearly 40% of GM shares, rather than 20%. But the source familiar with the restructuringdiscussions said the lower stake for the UAW does not open the way for bondholders to get a larger stake in GM.

The source said the Canadian government will own a small percentage of GM, as it does of Chrysler. The source added that a Treasury stakewell above 50% is fair given that the government has provided GM with $19.4 billion in help so far and will likely give the company tens of billions of dollarsmore to fund its operations during bankruptcy.

General Motors' U.S. operations are not the only ones experiencing trouble. The company is looking to sell a majority stake in itsmoney-losing European business, which operates under the Opel and Vauxhall brands.

On Wednesday, GM spun off those brands - including plants, sales organizations and patents - into a new company. GM said the move will allowthe German government to place those assets into a trusteeship and provide its own bailout to continue operations until a sale can be finalized
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