Posted by: David Welch on May 22, 2009
The United Auto Workers reached a tentative deal with General Motors yesterday on some more concessions. The deal is supposed to mirror the one ratified by union workers at Chrysler at the end of April. It probably means that half of the $20 billion GM owes the union to start a retiree healthcare trust will be paid in stock instead of cash. GM will be clear to get rid of 21,000 workers, in part because of relaxed work rules that mean each plant needs fewer hands on deck. It should put the company on its way to lower labor costs from $6.4 billion this year to $4 billion in 2014. It’s also a big piece in either avoiding bankruptcy, which appears doubtful, or preparing for a quick exit from Chapter 11 if the company files in the next week or so.
In conversations with GM executives and some of their advisors this week, bankruptcy appears to be a foregone conclusion. There’s almost no way GM can get 90% of the bondholders who own some $27 billion in GM debt to take a big cram down. GM may also need bankruptcy to get rid of the 1,600 dealers that the company wants to cut by the end of 2010. Some of them will just sell to other dealers, but plenty will need a swift kick from the company to go away. If those dealers want to sue, it’s big money from GM to buy out their franchise agreements. But in bankruptcy, GM can get rid of dealers much more easily. In fact, one executive told me that the only reason Pontiac was in the company’s original fix-it plan was that it would have saved more than a billion dollars if GM kept just one Pontiac model around. But once the company—absent former Chairman and CEO Rick Wagoner—became more open to bankruptcy, GM no longer needed to keep a token version of Pontiac to evade legal fees and settlement costs.
These days, anything can happen. Perhaps if bondholders see what happen to the dissenting creditors in Chrysler’s bankruptcy (their group has fallen apart) they may take the deal and swap their debt for a stake in the new GM. But I doubt it. One sources close to the situation told me that GM and Treasury haven’t really thought they could avoid a Chapter 11 for some time. Negotiating with bondholders was almost a show. Almost no one thought they could get a deal done outside of court. So look for that filing just before June 1.