GM’s debt-for-stock swap plan
General Motors Corp. on Monday unveiled a plan to swap its debt for common stock — a move that could potentially help the storied U.S. automaker stave off a bankruptcy filing by significantly alleviating its debt burden.
GM currently has about $27 billion in unsecured debt. If the company wants to avoid bankruptcy, it needs to retire most of that debt while simultaneously exchanging half of the loan it received from the government for stock as well. Further, GM is asking the United Auto Workers union to accept stock for at least half of the $20 billion the company must pay into a retiree fund beginning next year.
Those moves could provide enough leeway for GM to avoid bankruptcy and continue to revamp its operations to remain solvent.
How exactly will the proposed exchange of debt for stock work, and is it likely to be successful? Here are some questions and answers.
Q: What’s involved in the debt-for-equity swap?
A: General Motors is offering to give investors common stock in its company in exchange for unsecured debt the investors currently hold.
Unsecured debt is essentially a loan or bond that must be repaid with interest, but that is not backed by any assets, meaning that those who hold it are at risk of losing their entire investment if a company fails and is unable to pay back the loan. There is no asset for an investor to claim ownership of when unsecured debt fails to be repaid, in contrast to, say, a mortgage, where the bank gets the house in the event of a default.
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