As I’ve noted in prior posts, if you want to know what kind of cars GM and Chrysler will now produce, look no further than British Leyland. In the case of GM, we can pretty much assume that the same administration that says it doesn’t want to micromanage the company’s operations will do just that. I’m anticipating production of cars that people don’t want or are of low quality – or both.
But let’s hit the main points of the GM bankruptcy, shall we? Both what’s in the ‘White House Fact Sheet’ and what’s not.
1. Protectionism. Originally, GM wanted to produce smaller cars in Europe and China for import into the US market, thereby causing an unholy row with the UAW. But with this administration, what the union wants, the union gets. Under GM’s reorganization plan, that’s now out the window. According to the UK Telegraph, there was at least something of a quid pro quo involved: the union agreed to take a 17.5% stake in the company rather than 39% in exchange for a commitment to manufacture in the US.
2. The Union Jumps Ahead of the Unsecured Bondholders. While the secured creditors are being treated far better than in the Chrysler Chapter 11, the unsecured bondholders are getting the snot kicked out of them. To avoid the ‘absolute priority rule’ in Chapter 11, the government had to get a majority of the bondholders to agree to a plan going in. According to the fact sheet, 54% of the bondholders have agreed to exchange debt for 10% of the equity – well behind the UAW Trust, which didn’t have nearly as much skin in the game.
3. The Secureds Make Out Better. Although it’s not discussed in the fact sheet, the WSJ and other outlets are reporting that the secureds will get 100%, but probably not in cash.
However, full recovery likely won’t be in cash, and the unsecured lenders are probably in for a beating, as Zero Hedge writes:
“GM secured lenders will get full recoveries on their loans, which is not to say full cash repayment but rather a notional roll into ‘Good GM’ at par value … however the major haircuts at the unsecured, bond level will prove to be a much more relevant issue for the expediency of the bankruptcy case. It is not so much the treatment of the above-fulcrum security that is a concern (either in this bankruptcy or any other), but the level of projected recoveries for the fulcrum, the residual for the securities below and the level of fulcrum holdouts.”
GM’s largest secured lenders include J.P. Morgan Chase & Co. (NYSE: PM), Citigroup Inc. (NYSE:C) and Credit Suisse Group. GM has a $4.5 billion revolving line of credit that comes due in 2011 and a $1.5 billion term loan due in 2013. The decision to protect the secured lenders may be Treasury trying to send a message that what happened with Chrysler LLC was a one-time event. That carmaker’s secured creditors had to eat big losses on their loans to Chrysler, as they received about 29 cents on the dollar for the $6.9 billion they were owed.
That last bit is key. Who’s going to want to lend money to either company if the government can abrogate contracts at will?
4. Union Pension and Health Care Benefits Come Over Intact into the ‘New’ GM. The fact sheet states that the current, unaffordable pension plan comes across intact. Union health care benefits as well (which are also included in retirement benefits). While the plan calls for the creation of a trust to fund health care benefits, I can’t believe it’s fully funded – unless Hope ‘n Change is counting on ‘savings’ when he nationalizes all our health care. Uh huh.
5. GM Can Make Its Own Decisions Except for the Important Ones. You think I’m kidding? Straight from the Fact Sheet:
• In exceptional cases where the U.S. government feels it is necessary to respond to a company’s request for substantial assistance, the government will reserve the right to set upfront conditions to protect taxpayers, promote financial stability and encourage growth. When necessary, these conditions may include restructurings similar to that now underway at GM as well as changes to ensure a strong board of directors that selects management with a sound long-term vision to restore their companies to profitability and to end the need for government support as quickly as is
practically feasible.• After any up-front conditions are in place, the government will protect the taxpayers’ investment by managing its ownership stake in a hands-off, commercial manner. The government will not interfere with or exert control over day-to-day company operations. No government employees will serve on the boards or be employed by these companies.
• As a common shareholder, the government will only vote on core governance issues, including the selection of a company’s board of directors and major corporate events or transactions. While protecting taxpayer resources, the government intends to be extremely disciplined as to how it intends to use even these limited rights.
All that stuff from Hope ‘n Change and the fact sheet about a ‘hands off’ style is Bravo Sierra. The real intention is contained in the last bullet above: as the overwhelming majority common shareholder, Hope ‘n Change will pick the board, believe you me.
But they’ll do it in a ‘disciplined’ manner.
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