General Motors (GM) has moved closer to a historic bankruptcy filing, with much work still needed to reach a deal with bondholders as a deadline looms. Details of the automaker's tentative deal with the United Auto Workers showed, meanwhile, that the union will wind up with a lower stake in the company than expected.
GM faces a deadline of May 31 to show the White House that it has restructured its balance sheet and operations and reduced enough bond debt to avoid the need for bankruptcy. A committee representing bondholders who own roughly $12 billion of $27 billion in bond debt will issue a statement on Wednesday, May 27, addressing whether it has reached a new deal with GM and the U.S. Treasury Dept.'s Auto Task Force.
The agreement with the union, reached on May 21, will reduce labor costs and drop the stake to be taken by the union's health-care trust—which will pay worker and retiree medical benefits starting next year—to 17.5%, from an originally planned 39%, sources say.
That change in UAW ownership could result in one of two things. GM could use the additional equity to sweeten an offer to bondholders in an effort to avoid bankruptcy. Or GM could give the government more equity, which would help the company emerge from its restructuring with a cleaner balance sheet. Sources close to the company say the latter is more likely. If the government doesn't find a way to erase some of the money GM owes it, the company would owe more than $40 billion to all stakeholders. But by offering equity to the feds, GM could emerge with much less debt.
Chapter 11 Could Sever GM Contracts
Avoiding bankruptcy will still be tough to do. The bondholders committee essentially rejected GM's deal when it proposed a counteroffer on Apr. 30. GM Chief Executive Officer Frederick "Fritz" Henderson has said publicly that the counteroffer didn't meet Treasury's requirements.
The bondholder committee and the task force were still talking this week, so a last-minute deal could still be struck. But even if the bondholders buy in, GM would have to convince 90% of the total creditor group to take the same deal. And GM has other reasons to seek court protection: It could use the Chapter 11 process to get rid of unwanted brands and cancel franchise agreements with some 1,600 dealers. If the company does that outside of court, it might have to pay dealers billions in legal fees and settlements.
On May 22, the Detroit automaker borrowed $4 billion from the federal government on top of the $15.4 billion it had already received.
UAW members will vote to ratify the union's tentative deal by Friday, May 29. GM's tentative agreement with the union is designed to save the company more than $1.5 billion a year by reducing retiree health-care obligations and cutting labor costs.
Ford Would Want Comparable Reductions
The agreement is similar to concessions the union granted Chrysler last month, including a suspension of workers' cost-of-living allowances, bonuses, and some union holidays. Wages are expected to remain unchanged, although they have been mostly hammered down to levels near those that Toyota (TM) and Honda (HMC) pay workers in their U.S. factories.
Ford (F) already has reached a deal with the union to reduce labor costs, but GM's agreement contains far steeper cuts. Ford officials have said they will seek further changes so that its deal with the union is similar to GM's.
GM owed the UAW's health-care fund $20 billion. But in response to White House demands, the union agreed to cut the cash obligation and take a large portion of what it is owed in stock and debt. Under the new agreement, the UAW will receive a new note for $2.5 billion payable in cash, plus preferred stock. The UAW will be given $6.5 billion in preferred GM stock after it emerges from bankruptcy. That stock includes a 9% cash dividend, meaning the union's trust fund will receive $585 million annually for as long as the UAW holds the stock.
That debt is to be paid out in three installments coming in 2013, 2015, and 2017.
GM Has Far Fewer Creditors on Board
In contrast, the bondholders were only being offered a 9% stake in GM in exchange for concessions, and they have balked at what they regard as inequitable treatment, compared with the union's arrangement. "It wasn't particularly generous" to the bondholders, said Shelly Lombard, senior credit analyst at New York-based bond research firm Gimme Credit. "I think it's one of those things where GM now figures bankruptcy is inevitable."
The deal with the union could help bankruptcy move quickly, as it has with Chrysler. But GM's situation is more complicated, sources say. The majority of Chrysler's secured creditors had agreed to cut their debt before the automaker filed for bankruptcy protection. GM may go in with a much smaller share of secured creditors in agreement.
Also, the government will likely end up with a larger stake in GM. That may be riskier for taxpayers than loaning the company money. But the government could also help create a more valuable GM by releasing the company from bankruptcy with less debt. Its earnings power would be stronger and shares could gain value more rapidly.
If all goes as planned—and if GM's cost cuts and the new products from its pared-down brand portfolio pan out—the company's new shares could gain value and the government and UAW could sell their positions quickly. Says one source close to the deal: "The government doesn't want to own GM very long."