GM's Bond Restructing Plan

After reading through GM's restructuring plan, it strikes me that the $18 billion loan from the government is only the beginning of the money that GM is asking for. Take a look at page 11:

GM's Plan includes, and is conditioned upon, significant sacrifice and deleveraging of GM's balance sheet...
GM will immediately engage current lenders, bond holders, and its unions to satisfactorily negotiate the changes necessary to achieve this capital structure.

And what does GM's balance sheet look like after all this sacrifice and engagement? Total debt has been magically reduced from $62 billion to $30 billion. In other words, the government might provide $18 billion in new money, but GM's creditors are going to be asked to provide $32 billion in debt relief.

I spoke this afternoon to Troy Clarke, the head of GM's North America business, and he said that roughly half of the renegotiated debt would come in the form of lower contributions to the trusts run on behalf of GM workers by the UAW -- the so-called VEBA contributions. But yes, the other half of the debt restructuring would involve bondholders.

Which means that GM is going to ask bondholders to voluntarily give up $16 billion of future income as part of this plan, and it's not going to have a bankruptcy court giving it any muscle to help it do so. Is this even possible? Clarke's not a financial expert, and couldn't give me much in the way of detail on whether GM's bonds have any provisions which might facilitate a bond restructuring outside bankruptcy. I'm hoping to hear back from someone else within GM on this subject. But Clarke did say that the bond restructuring was "a necessary and critical element of the plan", and that he would be fine with the government making its own aid conditional on such a restructuring going through.

In fact, the plan is in many ways a fill-in-the-blanks document -- something Congress can pick up and run with, rather than simply approve. It doesn't suggest an interest rate for the government's loans, or suggest how much government aid could come in the form of preferred stock. It clearly sees a government role in terms of bullying bondholders into giving up that to which they are contractually entitled, however: "Oversight Board involvement may be necessary to be successful," is the way GM puts it. What bondholders will think of this, and whether they will have any ability to hold out and free-ride on everybody else, remains to be seen.

Clarke did reiterate to me, unsurprisingly, the "bankruptcy is not an option" mantra, saying that a large part of the reason for the fact that GM's sales fell more than those of the auto industry as a whole last month was that would-be buyers were put off by even the possibility of bankruptcy. Is that true? Probably. Is it surmountable, especially with a government guarantee on GM's warranties? Yes, I think so. It's got to be no harder than restructuring bonds outside bankruptcy while retaining some stake for shareholders, in any case.

Comments

[A US taxpayer:]

Bankruptcy without Govt intervention is a good option for bondholder.

Give away under-funded and poorly managed pension to PBGC, cancel Veba and strip out all assets and sell it off to foreign company, and I bet vulture funds make more than 25 bucks per bond. So there is a return potential. But all others are worse off;

Shareholders get $0, of course.
Workers do lose job next 2-3 years, and many lives will be ruined.
Likely this will extend recession much longer.
No bottom for Michigan housing.
Very high political cost to democrats

However, there is no upside for bondholders to give up their rights as lenders. If GM thinks the bond holders will take equal exchange with equity for 50%, they are sadly mistaken. No one believes that GM/F CHrysler is a going concern with or without Govt loans, not even UAW leader Gettelfinger, who avoded answering today whether UAW is willing to take GM equity for its member's 401 k. He sure made it sound like "we will take our free ride with govt money but are not willing/foolish enough to share the equity risk."

If anything, bondholders are likely to ask US Govt to guarantee the debt, not exchange it for equity share. I can see new addition to Barclay's agency debt index.

So you are looking at at least 16 billion more of the US Govt line of credit for GM/F/Chrysler, for total of what, 53 billion and more?

Let's review that planned bankruptcy option again.

2008 Dec 04 02:57 AM

[GMBond007:]

Hi,

I have bonds of GM in my depot. What do you expect will happen to them

a) in case of bankruptcy,

b) prearranged bankruptcy

c) under bail out conditions.





On Dec 04 02:57 AM A US taxpayer wrote:

> Bankruptcy without Govt intervention is a good option for bondholder.
>
>
> Give away under-funded and poorly managed pension to PBGC, cancel
> Veba and strip out all assets and sell it off to foreign company,
> and I bet vulture funds make more than 25 bucks per bond. So there
> is a return potential. But all others are worse off;
>
> Shareholders get $0, of course.
> Workers do lose job next 2-3 years, and many lives will be ruined.
>
> Likely this will extend recession much longer.
> No bottom for Michigan housing.
> Very high political cost to democrats
>
> However, there is no upside for bondholders to give up their rights
> as lenders. If GM thinks the bond holders will take equal exchange
> with equity for 50%, they are sadly mistaken. No one believes that
> GM/F CHrysler is a going concern with or without Govt loans, not
> even UAW leader Gettelfinger, who avoded answering today whether
> UAW is willing to take GM equity for its member's 401 k. He sure
> made it sound like "we will take our free ride with govt money but
> are not willing/foolish enough to share the equity risk."
>
> If anything, bondholders are likely to ask US Govt to guarantee the
> debt, not exchange it for equity share. I can see new addition to
> Barclay's agency debt index.
>
> So you are looking at at least 16 billion more of the US Govt line
> of credit for GM/F/Chrysler, for total of what, 53 billion and more?
>
>
> Let's review that planned bankruptcy option again.

2008 Dec 04 04:24 AM

[Mike123A:]

'Plan B' Gm-F-Chrysler merge and create a new industry of Homes not Cars for Global distribution and retrieval. Construction jobs increase, tooling companies stimulate the economy and the bond holders will have a hugh return on their investment. The new industry will obsolete the slums and aged cities as well as create work for everyone. Not pie in the sky. It will take the USA North American Operations (NAO)) Auto Industry to get us out of this Global Economic downturn. Nature abhors a vaccum and in the place of cars GM-F-Chrysler will evolve to rebuild our economy.

2008 Dec 04 09:15 AM

[nym:]

'Plan B' US auto makers are bad at the only industry they know about. It makes no sense to choose them for a new industry.

2008 Dec 04 09:58 AM

[k45:]

I think it makes more sense to use the gov't money to retrain workers and find new industries to use the old buildings. The problem is that there is not enough demand for the production available. Keeping those factories alive will just be throwing good money after bad.

2008 Dec 04 11:57 AM

[Gary Watson:]

I suggest bondholders receive a 50% payout in cash funded by the federal government by buying pfd stock in GM @ a 4% return. The same for Veba. Issue a tender offer based on the above with the proviso that all parties agree prior to execution. I believe this will be the least expensive way to go!!!


On Dec 04 02:57 AM A US taxpayer wrote:

> Bankruptcy without Govt intervention is a good option for bondholder.
>
>
> Give away under-funded and poorly managed pension to PBGC, cancel
> Veba and strip out all assets and sell it off to foreign company,
> and I bet vulture funds make more than 25 bucks per bond. So there
> is a return potential. But all others are worse off;
>
> Shareholders get $0, of course.
> Workers do lose job next 2-3 years, and many lives will be ruined.
>
> Likely this will extend recession much longer.
> No bottom for Michigan housing.
> Very high political cost to democrats
>
> However, there is no upside for bondholders to give up their rights
> as lenders. If GM thinks the bond holders will take equal exchange
> with equity for 50%, they are sadly mistaken. No one believes that
> GM/F CHrysler is a going concern with or without Govt loans, not
> even UAW leader Gettelfinger, who avoded answering today whether
> UAW is willing to take GM equity for its member's 401 k. He sure
> made it sound like "we will take our free ride with govt money but
> are not willing/foolish enough to share the equity risk."
>
> If anything, bondholders are likely to ask US Govt to guarantee the
> debt, not exchange it for equity share. I can see new addition to
> Barclay's agency debt index.
>
> So you are looking at at least 16 billion more of the US Govt line
> of credit for GM/F/Chrysler, for total of what, 53 billion and more?
>
>
> Let's review that planned bankruptcy option again.

Apr 03 10:43 AM