The restructuring maven wonders why the Obama Administration isn't demanding that all of GM's debt be converted to equity
Wilbur L. Ross Jr. knows his way around a restructuring. For more than two decades he worked at investment bank Rothschild as an adviser to the creditors and stockholders of such blowups as Eastern Air Lines and Texaco. Now he runs his own investment group, WL Ross, which has stakes in a host of distressed properties, from Indian textile companies to a Florida community bank. Ross' firm is best known for its roll-up of the damaged U.S. steel makers LTV and Bethlehem Steel, which were eventually sold to ArcelorMittal (MT) for a tidy profit in 2005. Now one of Ross' largest holdings is International Automotive Components, a $3 billion-plus company cobbled together from parts of troubled car-parts makers Collins & Aikman and Lear, which has him closely watching the drama in Detroit.
BusinessWeek Senior Writer Nanette Byrnes interviewed Ross by phone on Mar. 31 about the Obama Administration's plans for General Motors (GM). Here is an edited version of that conversation:
BW: What are the chances that General Motors avoids bankruptcy?
And if it doesn't?
If the company does go bankrupt, the likelihood is that all the bonds and the VEBA [its medical plan for workers] are turned into equity, which is worse than what they're being asked to do right now. In addition, the union has the risk of the contract being abrogated.
Who else is affected if there is a bankruptcy?
The government has figured out they need to protect the suppliers and the warranties. The only thing I haven't seen conclusively is how they'll deal with the dealers. I know they're working on it.
GM has 60 days; that's not much time.
The government wants the companies to be acting with a sense of urgency that was missing from the prior negotiations, frankly. They are determined to drive the costs down to where the companies can survive in a much more modest form. I interpret the government's action to be a warning shot over everyone's bow that they aren't kidding around. They really want these changes.
To stay out of bankruptcy, I gather, GM has to get two-thirds of the debt holders to agree to have their stake turned into equity.
I don't understand why the government did not require all the debt to be converted. I don't think [GM] should have any debt. They are spending something like $3,000 a car on interest, and they don't make $3,000 a car. It's a big disadvantage relative to Toyota (TM).
There are costs to bankruptcy, too.
There are some special powers you get in a bankruptcy. It would eliminate any interest on the unsecured debt during the bankruptcy period. The professional fees would be high, but the chances are they would save more in interest than they would incur in bank fees. They would be literally better off. There would be hundreds of millions of dollars in professional fees, but they have $26 billion of debt, and that's billions in interest.
Are there lessons to draw from the steel bankruptcies? If GM does go bankrupt, is that going to be devastating to the Pension Benefit Guaranty Corp., the government-backed insurer of pensions?
In the case of the steel industry, the bankruptcy courts basically eliminated all of the retiree benefits and turned those over to the government. Until the market crash, GM's pension plan was pretty well-funded, not nearly as bad as the steel companies. Bankruptcy is merely a mechanism, and it's a mechanism by which you achieve an objective—it isn't an objective in itself. Anything you can't negotiate out of court is what you need to take into bankruptcy. GM probably has some contracts it wishes it didn't have—maybe to purchase commodities at high prices, maybe some leases. All things like that you can get rid of.
Will Fritz Henderson, Wagoner's replacement as CEO, be running GM, or will Obama's task force?
There are two questions in that regard. One is who's going to pick the majority of the new board—the government or the old board? It would be good for the country if the private sector picked it. The government gave tons of money to the banks, and as far as I can tell didn't put anyone on their boards. It's a very slippery slope for them to go down. Now, about the only loans you can get somehow involve the government. Will the country be able to wean itself from that? That's what we very much need to have happen.
Is Henderson up to the job?
Henderson himself has an extremely good reputation. A lot of people were lobbying to have him replace Wagoner even sooner. He's seen as being more of an agent for change.