GM Slashes the UAW's Equity Stake

As a deadline looms for bondholders, details emerge of a deal to trim labor costs and hand 17.5% of General Motors to the United Auto Workers

By David Welch and David Kiley

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.

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