GM's proposal would give bondholders next to nothing

DETROIT -- On Monday, GM told bondholders they're about to get next to nothing — about 10% equity in the company — for the about $27 billion they lent GM.

By contrast, the U.S. Treasury would get a 50% stake and a GM promise to pay back half of the $20 billion in loans.

The United Auto Workers would get a 39% stake in GM for forgiving about $10 billion owed to a health care trust fund. Existing shareholders get the 1% left.

The offer "that General Motors announced this morning must look to bondholders like something Tony Soprano dreamed up," says Shelly Lombard, an analyst at Gimme Credit.

Q: Who holds the bonds?

A: A diverse group. There are big banks, who lent GM almost $11 billion over the years, and big retirement funds. They knew GM bonds were risky, certainly since bond-rating agencies sank GM's debt to junk in 2006.

But there are also individuals, who bought long-term bonds because they came with high payouts. They hold about $5 billion of GM's debt.

"This is definitely going to hit the individual investors much more than the larger pension funds," says Kip Penniman, high-yield bond analyst at KDP Investment Advisors.

Q: What can bondholders do now?

A: Big holders who bought an insurance policy — otherwise known as a credit default swap — may be crossing their fingers and hoping GM files for bankruptcy. The swaps pay when a company files for bankruptcy or closes, so there's temptation to let the company file.

GM CEO Fritz Henderson says he doesn't think there are too many investors betting against GM, although because they aren't regulated, no one knows for sure.

"It's not something we think is fatal to the bond exchange," Henderson says. "We have a reasonable chance of being successful."

Others may do better trading for shares now than gambling on bankruptcy, Lombard says, where the Treasury, dealers, suppliers and the UAW will also be looking for a piece of the pie.