GM's Viability Plan: Trying to Shrink Quickly Via Debt Exchange Offer

To survive, GM needs to shrink itself to a manageable size. Its new viability plan intends to do just that. The key provision of the plan is to reduce debt, swapping 225 shares of equity for each $1,000 outstanding principal of its unsecured public notes. $27 billion of unsecured notes are currently outstanding and GM is requiring that 90% of debtholders agree to the swap or else the company will file for bankruptcy.

The plan would leave the U.S. government as the largest shareholder in the reorganized Citigroup (C), which is only fair considering the substantial debtor-in-possession financing taxpayers have provided…

Two key dates to keep in mind are May 26th and June 1st. The first is the deadline for the debt exchange offer. If 90% of noteholders haven’t agreed to the exchange as of 11:59 PM on May 26th, then GM will file bankruptcy on June 1st.

CEO Henderson was very direct on this point at his press conference this morning. GM would like to reduce its obligations out of court if possible, by getting debtholders to voluntarily exchange their debt for equity. But if debtholders aren’t cooperative, GM will reduce its debt via a bankruptcy filing.

[Debt for equity swaps, by the way, would be a key component of a real restructuring for the banking sector as well. It would drastically reduce liabilities and give banks substantial new equity with which to absorb losses on the asset side of the balance sheet. Shareholders would have to be wiped out first, however.]

Other key parts of GM’s new “viability plan”….

• $10 billion of the $20 billion owed by GM to the trust responsible for retiree healthcare costs (”VEBA”) will be paid in GM common stock, not cash.
• By year-end GM plans to employ 21,000 fewer hourly workers
• By year-end 2010, it will reduce its dealer network 40%
• GM will focus on four core brands: Chevy, Cadillac, Buick, and GMC. Pontiac will be eliminated. Saab is reorganizing under Swedish law in order to separate itself from GM. HUMMER is on the block and a determination will be made in early May whether the brand will be sold or phased out. Saturn is also for sale. A “decision regarding sale of phase out” will be made “by the end of 2009.”

What do all of the above have in common? They reduce cash expenses, from interest on debt to labor costs to capital expenditures. Without substantial cost reductions, GM can’t continue as a going concern.

GM isn’t off the dole, by the way. To get from here to there, Treasury will extend an additional $11.6 billion in loans. That’s on top of $15.4 billion already received since late last year.

For all the details, OA recommends you glance at GM’s S-4 filing with the SEC. It’s a long doc. In particular, see pages 67-78, which detail the restructuring plan.

Comments

[Warm_Paw:]

I realize all of this money is being thrown at GM to keep people employed. If they earn money it recirculates into the economy.
The real issue is this:
No one is buying their cars.
Do they keep building cars only to store them on some vast parking lot?
Why not just give the bailout to the employees directly. There'd be more spending money as a result.

A better plan - Obama removes the bloated pigs at the trough running GM and brings in Engineers into renewable energy research and construction.
GM now supplies solar panels we can erect in desert waste land and create energy reducing the amount of oil we use.
I'm sure California would love to breath again.

GM now creates wind turbines like GE.

A product is created that sells.
If GM is going to be owned by the tax payer, we should have a say in what they produce.

Build something that sells. Employ people to create new technologies. Otherwise the bailout is a band aid and only contributes to the next generation inheriting an even nastier financial disaster.

Apr 27 02:59 PM

[conceptwizard:]

If the Government is to be involved then they should let GM go into Chapter 11, buy it for pennies on the dollar and start building green cars. Don't just thow taxpayers money away. Give it to the UAW as a gift with a loan attached, to be paid back to the taxpayer with interest and let them run it. They can control their own destiny. Any profits they can keep to fund their lifestyle after the bills are paid. Many employees have purchased their companies under duress. Westjet comes to mind. Let them wear the responsibility.

Apr 27 03:40 PM

[jstratt:]

It is hard to know exactly based on the information coming out. I read that the Canadian UAW settled with no loss in pay which is discouraging. Hopefully some other productivity issues got resolved.

If I was a bond holder I would have to consider bankruptcy. That is especially true if I had Credit default Swaps protecting me from losses.

Apr 27 04:57 PM

[Donald Johnson:]

In a piece called "GM Spins its wheels," Liam Denning at wsj.com reports that Brian Johnson of Barclays Capital calculates this deal is unlikely to fly with bondholders.

"Under the current plan, Brian Johnson of Barclays Capital estimates GM's net debt by 2013 could total $48 billion. Assume, optimistically, GM makes $15 billion of earnings before interest, tax, depreciation and amortization that year. A multiple of five times Ebitda implies an enterprise value of $75 billion, and equity value of $27 billion. On that basis, the 9% of the restructured company's equity offered to bondholders would equate to about 10 cents on the dollar of their outstanding claims.

The uncertainty involved, however, is enormous: Assume Ebitda of $12 billion and a multiple of four times, and equity is worthless. Bondholders would find themselves minority shareholders in a strange beast controlled by Washington and union members. With 90% bondholder approval needed for this new proposal, it looks like a non-starter. "

Link:

online.wsj.com/article...

Apr 27 05:57 PM

[Thadeus III:]

Gawd some people are so ignorant and full of it. GM still sold more cars than Toyota the first 3 months of this year in the US. Go Google the chart yourself. "No one is buying GM's cars or trucks" . Overstated poppy cock. If GM and this country go down, it will be because of clueless and ignorant babble. If GM and Chrysler go down, Ford would be left with little suppliers. The suppliers are all interlinked across all major US brands. People just don't get the infrastructure of the auto industry. It isn't like an airline, home builder, or appliance maker.

Apr 27 11:14 PM

[cynewulf:]

When you have a pig this special, you don't eat him all at once. Obama is taking the taxpayers for a ride because he likes the taste of all this hand-wringing and save us talk. G.M. is dead meat with an anchor attached.

Apr 27 11:33 PM

[Evelyn Guzman:]

I thought they have had their last breathe. But anyway shrinking it may help. That is why they have already closed down some branches or offshoots so I heard from the news last night. I feel bad though for all those affected and had relied on this company for their livelihood, including their health care and retirement.

Evelyn Guzman
www.debtchallenges.com (If you want to visit, just click but if it doesn’t work, copy and paste it onto your browser.)

Apr 28 08:06 AM

[a. palmer jr.:]

I thought the name of the game is screw the little guy. So far we're taking from the stock holders, the bond holders, and the hourly workers. As long as the CEOs, higher supervisory personnel and politicians aren't affected it looks like it's a go!

Apr 28 12:36 PM

[a. palmer jr.:]

One thing that should be stressed again...GM, in order to survive is going to have to start building cars that people want to buy. Maybe they should send out mailers to every household and ask people what kind of car they would buy if they were in the market. I'll bet GM officials would be greatly surprised at what we would tell them.

Apr 28 05:22 PM