Antony Currie says that it's possible to structure a GM bailout so that it behaves like a bankruptcy without being called a bankruptcy:
If an official bankruptcy label is really too scary, another template already exists: the government bailout of Chrysler almost 30 years ago, when shareholders, bondholders, car dealers and employees all made considerable concessions in return for federal financial support. That sounds like a Chapter 11 process, but was never labeled as such.
Brian Johnson of Barclays Capital has an idea of how such a GM bail-in might be structured, in a research note dated November 10:
To create a long-term viable company (and thus protect taxpayers), lawmakers and/or Treasury may choose to follow an approach similar to the Treasury's assistance to Chrysler in 1979-81...
We assume that existing long-term debt is exchanged for new, government backed debt for 30 cents on the dollar and a substantial portion of the recapitalized GM equity. Similar, the 2010 VEBA contribution of $7 bil cash, $4.4 bil of covert debt and $5.6 bil of future payments, is swapped at 60 cents on the dollar for new government backed bonds along with equity...
The Federal Government would purchase $8 bil of TARP-like preferred stock of loans for 2009 cash needs... As GM may not meet 'viability' requirements for Energy Bill assistance, we assume $2 bil in an Energy Bill loan. The total Federal support package would be $30.7 bil: $20.7 of bond guarantees, $8 bil of Tarp-like preferred, and $2 bil of energy bill loans. As in the Chrysler deal or the TARP program, we assume that the government would receive equity or warrants in GM - based on TARP, we have assumed 15% of the value of the loan package, or about 17% of the recapitalized company, if exercised.
As in a Chapter 11 proceeding, most of the equity in the recapitalized company is distributed to debt holders and to 'exit financers' (in this case the Federal Government), in rough proportion to their contributions. We assume, somewhat arbitrarily, that about 2% of the reorganized company, or $1 per current GM share, is left with current shareholders.
This is just the way that the finances are worked out, of course: any agreements about the future direction of the company, and specifically how fuel-efficient its new vehicles will be, would have to be worked out in parallel. GM would also be very well advised to take this opportunity to slash the number of dealers and marques it has. In any event, this kind of a deal would have the same effect as the US government providing debtor-in-possession financing within bankruptcy, without the negative headlines associated with a bankruptcy filing.
Would bondholders accept such a deal? Given where GM debt is trading, yes, I think they would -- although I don't know how US law would deal with holdouts who didn't want to take the government up on its offer. That's one area where bankruptcy is useful. But I'm sure a bailout bill could deal with recalcitrant bondholders in a clause or two. The tougher thing will be to get the lame-duck Bush Administration on board with this kind of a deal: if this has to wait until January, GM's position will be significantly worse.
Disclosure: no positions
This article has 6 comments:
A bankruptcy is a bankruptcy, no matter which name you call it by, and it's needed. Too bad politicians won't allow it to be called what ti is - but the population would be angry and votes would be lost. I guess it's just smart politics to change the name. There once was a crop called Rapeseed and we still use it, but it has a better name.
As the whole world is starting to see what a recession can do, each nation will take care of their own business first. Who else can we count on? Eventually, it's not the money. It's human capital! Human capital can multiply things. Use them well, they will save you. Otherwise, they can destroy you.
Auto industry is facing competitions from more countries than before. From high end, challenges come from Europeans, Japanese; and low end from Korea, China and India, the Big Three still position themselves on top strategically and market positioning-wise. That's not easy! To the rest of the world, they represent U.S. To American citizens, they deserve a lot more support than what we are giving them right now. All the other countries subsidize their auto in many ways to their advantages. Their citizen own their shares of stocks of their auto companies and Most Japanese drive Japanese car, most Korean drive Korean cars and same with Europeans...
If you are part of UAW, you are in a big family, you should start to own your own company, and act like a owner of your company. If every member, every employee starts to purchase your company stock, you don't need anybody to bail you out, your stock will soar!
The whole world is watching gas price, it's down. The pension is becoming a social issue, so is medical/insurance. The new president and new administration is going to handle that. What's left?
The structure. The structure need to adjust to the "New Production Infrastructure" which needs big organization to dominate their market and small (focused) operation to guarantee efficiency and performance.
So, the big three already have big organizations, they only need to release more power to their small units and provide support and R&D resources to these special units (divisions). You keep your company's big name, but each division is responsible for their performance. It's minor changes up to a big scope.
--Really Independent