GM Bondholders Accept Sweetened Deal

Bondholders at General Motors (Ticker: GM) agreed to exchange billions of debt for stock as part of the company’s massive restructuring effort.

According to The Associated Press, fifty-four percent of the automaker’s bondholders agreed to the swap.

Photo by cliff1066, courtesy of flickr

General Motors had $27 billion in unsecured debt, and the vote accounts for $14.6 billion worth of those bonds.

Bondholders rejected the term of last week’s debt for stock offer, what changed their minds?

It looks like warrants did the trick. 

Warrants are similar to options in that they allow their holder the opportunity to purchase or sell stock at a later date. However, warrants are issued directly from the company (unlike options).

The warrant’s holder has no obligation to act, but depending on how the underlying stock performs, it may be profitable for them to do so.  

In the case of General Motors, call warrants were used to sweeten the deal. If bondholders get their wish, then the price of GM’s stock will rise. The new higher price will allow them to buy the stock at the warrant price and perhaps sell immediately to capture the difference.

The company’s reorganization is being closely monitored by the Treasury Department, which previously demanded a 90 percent participation rate from bondholders. I think that demand gave GM too much credit– no pun intended.

Shares of GM fell 33 percent on Friday, closing at $0.75 each.