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General Motors Corp.'s attempts to cut its debt as required by the government's $13.4-billion loan hit a serious roadblock after one of the world's largest bond investors pulled out of talks with the automaker, an analyst said Thursday.

The decision by Pacific Investment Management Co., known as PIMCO, raises questions about whether the Obama administration will have to recast the goals of the loan agreement and increases the chances some analysts have forecast that the automaker might have to ask a bankruptcy court for help in cutting its debts.

As part of its federal loan deal, GM has to outline a strategy by Feb. 17 for reducing about $27.5 billion in debt by two-thirds. To accomplish that, GM had been negotiating with a committee of bondholders and the UAW, which must consider taking half of the money it's due for retiree health care costs as GM stock.

Without bankruptcy, GM must rely on bondholders and the UAW to voluntarily take cuts.

PIMCO's decision "suggests that negotiations are already unraveling amongst bondholders," KDP analyst Kip Penniman said in a research note to clients. "We don't believe GM can gather enough bondholders ... and holdouts will pose a major challenge to the company's efforts."

GM declined to comment, while PIMCO did not immediately return a call for comment.

Bill Gross, the famed co-chief investment officer of PIMCO, said Wednesday that his firm was quitting the talks. He told Bloomberg News that PIMCO had "the interests of our clients more at heart than the interests of particular corporations or even the government."

Bondholders on the committee are restricted from trading their GM debt because they have inside information about the company's finances, a restriction that PIMCO no longer faces because of its pullout from the committee.

The decision by PIMCO follows a similar move it made last month with GMAC, when it successfully bet that the federal government would not let the finance company fail even if it missed a debt-reduction target.

As part of its drive for government aid, GMAC needed to convince bondholders to swap 75% of some $38 billion in debt for equity. Bondholders held out for better terms, eventually turning in only 59% of the bonds sought.

But two days before the swap offer expired, federal officials stepped in and allowed GMAC to convert itself into a bank, allowing it to get aid from the $700-billion financial industry bailout. The U.S. Treasury eventually gave GMAC a $6-billion injection, allowing it to boost lending for new vehicles.

Because it sat out the exchange, the value of the GMAC bonds held by PIMCO rose after the rescue -- an outcome that several observers had said would complicate GM's efforts.

At the time, analysts also flagged the decision as signaling that the government would not let GM fail even if bondholders balked at the sacrifices being demanded from them. During the Detroit auto show last week, Deutsche Bank analyst Rod Lache raised the possibility that bondholders might make cuts only if forced by a bankruptcy court, and GM Chairman Rick Wagoner refused to rule out bankruptcy as a possibility.

If GM fails to make sufficient progress on reducing debt by March 31, the government could call back its loans and force it into bankruptcy. But the loan terms leave the decision about what's sufficient to the Obama administration, which has not spelled out any specifics.

Penniman said any transaction will require current GM shareholders to be wiped out and for the UAW to accept cuts in what GM owes to the retiree health care trust funds. UAW President Ron Gettelfinger has said the union already made significant sacrifices to keep the company afloat.

"Without a competitive labor structure and a reduction in near-term cash payments to fund future retire health care costs, GM is only postponing an inevitable bankruptcy down the road," Penniman said.

Seems like the only way out if for the feds to refi the entire debt for GM

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Same thing happened with GMAC. They never got sufficient enough bond holders to trade for preferred stock. Somehow, at the expiration time, the government waived the requirement.

Funny how that happened.

PIMCO would get their butts sued off if they traded the bonds in. It would be a breach of contract to their customers.

I laughed when Congress said the bond holder would have to "suffer" also. The bond holders are actually the only "winners" in a Chapter 7 bankruptcy (because they are the first creditor in line) so they are all saying "bring it on !"
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