The chance that General Motors (GM) ends up in bankruptcy to fix its problems appears more likely, people close to the company's plans said on Apr. 7. GM would like to avoid going to bankruptcy court, but the company is making preparations to file for protection. One of its biggest tasks before any filing is cutting a new deal with the United Auto Workers on health-care liabilities, these people say.
For months, GM and its legal advisers have examined a quick bankruptcy in which the auto giant enters court and splits into two companies—a ";good GM" with Cadillac, Chevrolet, Buick, and GMC—and a "bad GM" that has Hummer, Saturn, some shuttered factories, and a load of debt. The good GM would emerge quickly, sources say, while bondholders would be left to collect some portion of their collective $28 billion in debt from the assets in the bad GM.
Before executing such a deal, GM would need to strike a deal with the union that would bring wages in line with those at Japanese plants in the U.S. and get the UAW to take stock instead of cash for a big chunk of a health-care trust to pay retiree benefits, beginning in 2010. GM owes the UAW $20 billion for the health-care trust, called a Voluntary Employee Benefits Assn., or VEBA. GM has offered half in cash and half in stock to reduce its debt. But the Treasury Dept. said on Mar. 31 that GM needs to reduce that liability by much more. Treasury also concluded that GM needs to slash its $28 billion in bond debt by more than the two-thirds discount that was in GM's original plan. GM has offered its bondholders two-thirds of their bond value in stock and the rest in cash.
One source close to the situation says the Treasury Dept.'s Auto Task Force wants to see GM wipe away far more than half of the UAW liabilities to become viable and qualify for more loan money. That means GM needs the union to take much more than half the value of the remaining union health-care liabilities in stock.
the debate: what is GM's true value?
GM is negotiating with the UAW to give the union equity in the new company should GM file for bankruptcy protection. If GM can reduce that $20 billion burden, use bankruptcy to ditch most of its $28 billion in bond debt, and consolidate down to its four core brands, the company could be viable, say sources close to GM and Treasury.
At the same time, GM management wants to avoid bankruptcy by cutting its long-term obligations to the union and creditors out of court. All of that requires the union and bondholders to take stock in GM. While GM's shares trade at just 2 now, management has made the case that with less debt and without constant bankruptcy speculation, it would be worth far more. But all sides involved have been debating the company's true value.
If GM can slash those liabilities in or out of court, the government would then be more willing to loan GM upwards of $30 billion that the company needs to stay afloat until car sales rebound.
The task force has said a GM bankruptcy could be done speedily, but skeptics contend it will be difficult to execute such a case quickly, given the company's size and complexity. Creditors could hold up bankruptcy proceedings. Striking a deal with the union beforehand is no snap, either, says Dennis Virag, president of Automotive Consulting group in Ann Arbor, Mich. "A fast bankruptcy is an oxymoron," Virag says. "I think people in Washington grossly underestimate the difficulty of taking GM in and out of bankruptcy." Perhaps, but it's looking far more likely now.
Welch is BusinessWeek's Detroit bureau chief.