The company said Tuesday that it's buying 120 million shares at $27 per share from the United Auto Workers retiree health care trust. GM now pays 9 percent interest on the preferred shares, so the deal essentially refinances that debt to a much lower interest rate.
The stock repurchase is contingent a sale of debt, which is expected to take place on or before Sept. 30. The debt sale is likely to bring in more than $3.2 billion, and GM said the balance would be used for other general corporate purposes. GM will sell senior unsecured notes with five-, 10- or 30-year terms.
Separately, Moody's Investors Service returned the company's corporate debt to investment grade status, or Baa3. But it left the new bond offering at junk status with a Ba1 rating, a notch below investment grade. That's largely because the debt is unsecured and because of other company obligations, such as GM's $28 billion unfunded pension liability. The company's debt has been rated junk status since 2005 as it piled up billions in losses.
The health care trust currently holds 260 million GM preferred shares, while the Canadian government has 16 million. The company can buy back the shares at $25 each at the end of next year. It negotiated the deal with the trust to buy back part of its shares early at a $2 premium.
The trust got the shares after GM emerged from bankruptcy protection in 2009 to help pay the company's obligation for retiree health care. In a 2007 contract, the union agreed to take on an almost $50 billion obligation for retiree health care. The union made the concession as the company was headed into severe financial trouble. In exchange, GM agreed to contribute $26.5 billion to the trust.
GM wanted the union to take on the costs so it could move them off of its books. At the time the company was obligated to pay health insurance costs for hundreds of thousands of retirees and their spouses, a huge expense that was strangling the company's finances.