The Final Hours of GM?

“It’s more and more apparent General Motors will file for bankruptcy....The question now is when? Remember the June 1 deadline? It might happen before that. We have indications it might. And how will it affect bond holders and the workers?” Fox Business Network 5/22/2009

General Motors (GM) bondholders signaled today that they will flat out reject the conversion offer for 10% stake in the failing automaker, which pales in comparison to the portion the U.S. government and the Unions will hold of the restructured GM. The bondholders had suggested willingness to accept a 58% equity stake in the automaker which the Obama administration has stated is unrealistic. For a company with a market cap of less than $1 billion, it would still represent a major haircut for bondholders. The $27 billion worth of bonds are going to go unpaid on June 1st placing GM in default and almost undoubtedly putting bankruptcy filings in motion. However, a report out of the Washington Post today suggests that the Obama administration may force General Motors into bankruptcy as early as next week. Shares are selling off 22% today as equity holders try to abandon the sinking ship.

The last few days had been hopeful ones for the automaker as they had replaced the onerous labor agreements with the UAW with a more sustainable agreement that lowered both labor and health care costs to help them better compete with foreign automakers. In addition, GM’s sale of Opel (the German unit of GM) has attracted quite a bit of attention receiving 3 bids and rumors of a fourth. The stock had rallied more than 70% coming into Friday, even with the possibility of bankruptcy looming large. However, 3 executives knew better than to hold their shares in this situation and collectively sold off more than 200,000 shares according to a Wednesday SEC filings. This is the second time in a month that high level executives have unloaded their stock.

If in fact, the Obama administration does force the company into bankruptcy there will no doubt be a myriad of lawsuits from bondholders who will have been denied the right to negotiate until the predetermined deadline. Perhaps the two sides are still a long way from reaching consensus, but the same could have been said about management and the UAW just a few weeks ago. The point is that it is not up to the government to step in, after all, at this point what good does it serve to cut negotiations off a week early. As Douglas McIntyre points out on 247Wallst.com,

“The attempt by Chrysler creditors to halt or slow that company’s move through Chapter 11 failed in the bankruptcy court. But, those debtors were given until the government’s deadline to complete a deal. That effort may have failed, but the rules were not changed in the middle of the game.

The accusations that the Administration has trampled the legitimate rights of creditors is about to grow louder. A GM Chapter 11 filing before the end of May will be seen as depriving secured lenders and bondholders of a kind of “due process”, and that will send a signal to any other group which holds obligations from an American company receiving US aid.

The Administration’s actions with GM show that if there was ever a point at which the playing field was level, that time is gone. Those creditors that don’t knuckle under will get nothing at all.”

We do not want to get too far ahead of ourselves because the Washington Post story simply states that this early bankruptcy is a possibility and not a certainly. It is clear that sending GM into bankruptcy early would not be fair. Remember, it is the bondholders who are supposed to be paid first during a bankruptcy, they should have the right to protect their property given the fifth amendment right to due process under the law.

Original post

Comments

[not so dumb...:]

I own more than $100,000 in GM bonds -bought at close to par several years ago. These are an important part of my personel pension plan. This is money that I saved from my after tax wages. Think honestly about how long it would take you to save $100,000 from your after tax wages. The terms being offered to me-- 10% of the amount I paid for bonds-- while offering the union "50% of their debt as cash plus 39% stake in the new GM-- is grossly unfair and perhaps illegal. The treasury paid AIG $173 billion to save Wall Street jobs. If the treasury offered a similar deal to the bondholders it would cost only $27 billion and would keep GM from bankruptcy. This would save countless thousands of jobs for GM workers and suppliers. Obama says he will save/create thousands of jobs with his questionable programs, yet he's causing significant increase in unemployment with the handling of GM. This is a serious credability flaw for Obama's administration.

May 23 11:25 AM

[casey00001:]

Hoffman:
So when you buy a used car at a discount that still has a warranty attached to it designed to protect your investment, its OK, that the warranty gets changed to your detriment by lets say the Government
and you would still say to that person, those are the breaks when you buy a used car? Your argument is not logical. Nobody negotiates better than the UAW and hats off to them, the current Administration is like a corrupt cop in this situation.


On May 23 11:14 AM hoffman23 wrote:

> How many of the bondholders bought the paper at 10-15 cents on the
> dollar? Yet, they want to look like they paid all the face value.
> Bondholders are bulls--t. You gambled and lost. That's what RISK
> is all about. I'm not defending the workers, but the UAW has bent
> over in their efforts to save GM. And yes, THEY VOTE!! I am white
> collar GM and have taken pay cuts, work harder than ever before,
> and STILL care about this company. Bondholders are BS.

May 23 12:36 PM

[Crocodilian:]

Bondholders _will_ be paid first-- if there are assets which exceed liabilities with which to pay them. However, that's not the case, certainly not at Chrysler, and probably not at GM.

There's a "buzz du jour" going around which holds that somehow statutory creditors' rights are being violated at Chrysler, and potentially at GM, but this is spin. The reality is that the creditors know that the assets which could be liquidated to pay senior debt aren't worth anywhere near the amounts owed. Thomas Lauria, the attorney representing debt holders at Chrysler, has publicly stated that he'd settle for 50 cents on the dollar -- not consistent with a claim that there's some giant pool of assets available with which to satisfy creditors.

A senior bondholder, if he believes that he can achieve higher returns in liquidation, has every right to ask a judge in bankruptcy court for that. The reason that the bondholders _aren't_ asking for that is that the principal assets of the automakers are in tremendous oversupply, the world does not lack for 30 year old auto factories.

My guess is that in liquidation, GM and Chrysler facilities would be sold for scrap, and their highest value would be as scrap to other auto manufacturers in order to eliminate industry excess capacity.

May 23 02:18 PM

[casey00001:]

Creditors rights are being violated by the Government involvement. At this point in time there may not even be a level playing field even in bankruptcy. That is the factual reality. Remember that the bondholders are on the same tier as the UAW unsecured senior creditors, if they get nothing the UAW gets nothing.

Lauria never claimed a phantom pool of money existed, his complaint was the difference in the split. 55% to UAW (unsecured) versus in the case of Chrysler SECURED credit holders who got less once again due to Government interference.


On May 23 02:18 PM Crocodilian wrote:

> Bondholders _will_ be paid first-- if there are assets which exceed
> liabilities with which to pay them. However, that's not the case,
> certainly not at Chrysler, and probably not at GM.
>
> There's a "buzz du jour" going around which holds that somehow statutory
> creditors' rights are being violated at Chrysler, and potentially
> at GM, but this is spin. The reality is that the creditors know that
> the assets which could be liquidated to pay senior debt aren't worth
> anywhere near the amounts owed. Thomas Lauria, the attorney representing
> debt holders at Chrysler, has publicly stated that he'd settle for
> 50 cents on the dollar -- not consistent with a claim that there's
> some giant pool of assets available with which to satisfy creditors.
>
>
> A senior bondholder, if he believes that he can achieve higher returns
> in liquidation, has every right to ask a judge in bankruptcy court
> for that. The reason that the bondholders _aren't_ asking for that
> is that the principal assets of the automakers are in tremendous
> oversupply, the world does not lack for 30 year old auto factories.
>
>
> My guess is that in liquidation, GM and Chrysler facilities would
> be sold for scrap, and their highest value would be as scrap to other
> auto manufacturers in order to eliminate industry excess capacity.

May 23 02:58 PM

[dfalter:]

On May 23 02:18 PM Crocodilian wrote:
> Bondholders _will_ be paid first-- if there are assets which exceed
> liabilities with which to pay them. However, that's not the case,
> certainly not at Chrysler, and probably not at GM.

If assets exceed liabilities, there is no bankruptcy and shareholders get paid first (via dividends etc).

If there is a bankruptcy, the legal 'standard' option is for all debts to be cancelled and for creditors including bond holders to either be paid off or get an ownership stake in the company proportional to the amount of debt they held prior to the bankruptcy - with some adjustments as to who has priority over who. Unless the assets of the company are in fact worth exactly zero, bond holders should therefore get something.

In Chrysler's case, the secured creditors legally had absolute priority before any of UAWs claims, yet strangely they get less than half as much recovery.

In GM's case, bondholders legally have an equal standing to UAW's claim, yet strangely they are supposed to get about a tenth as much recovery.

The really funny thing is.. bondholders in Lehman Brothers are now likely to get a much better recovery than bondholders in GM. :)

May 23 03:36 PM

[Crocodilian:]

On May 23 03:36 PM dfalter wrote:

"In Chrysler's case, the secured creditors legally had absolute priority before any of UAWs claims, yet strangely they get less than half as much recovery."

Not true. This is one of the points which is most frequently misrepresented. Chrysler bondholders are being offered cash-- UAW pension funds are being offered stock, stock which most likely will prove to be worthless.

Everyone seems to glide over that point: Bondholders get cash, UAW pension fund gets scrip. I don't call that putting the Unions above the bondholders.

So bondholders are getting paid cash, and the UAW pension fund is getting a call option which probably is worth zero. The entity doing the DIP financing (the US Government) is willing to issue that call option, because the US Government, through the Pension Benefits Guarantee Corporation, would have to pick up that pension liability in the event of a Chrysler liquidation.

Again, its useful to go to the actual data: if bondholders thought that they could get paid through a liquidation, they could legally demand it. They are not. Its quite clear that in liquidation, Chrysler assets are worth a few cents on the dollar.

May 23 04:05 PM

[dfalter:]

On May 23 04:05 PM Crocodilian wrote:
>
> On May 23 03:36 PM dfalter wrote:
>
> "In Chrysler's case, the secured creditors legally had absolute priority
> before any of UAWs claims, yet strangely they get less than half
> as much recovery."
>
> Not true. This is one of the points which is most frequently misrepresented.
> Chrysler bondholders are being offered cash-- UAW pension funds are
> being offered stock, stock which most likely will prove to be worthless.
The UAW not only got a 55% equity stake, but also new debt with a high interest rate for 50% of the face value of the old debt.

The value of that new debt alone (even if you assume the equity is worth zero, which is not the case because the new company has very little debt) is much more than the recovery secured creditors got.

May 23 04:22 PM

[Crocodilian:]

On May 23 04:22 PM dfalter wrote:

"The UAW not only got a 55% equity stake, but also new debt with a high interest rate for 50% of the face value of the old debt.

The value of that new debt alone (even if you assume the equity is worth zero, which is not the case because the new company has very little debt) is much more than the recovery secured creditors got."

----------------------...

Again, there's a key piece of data missing here: the obligation of the Pension Benefits Guaranty Corporation -- which is effectively the US Government. Add to that the fact that the US is on the hook for various unemployment insurance schemes as well, and the outcome becomes more logical.

Chrysler is gone, wiped out, less than zero. That's evident from the fact that Daimler had to pay -- and still continues to pay-- money to be rid of Chrysler. Its quite unusual to have to pay someone to take your equity! If they had assets which they could sell to a third party purchaser for anything that approximated the debt owed secured creditors, the latter would demand that action from the judge. They're not demanding that, and haven't claimed that Chrysler assets are worth anything like what they're owed.


What's happening seems to be this:

US Government has a massive contingent obligation to fund Chrysler pensions through the Pension Benefits Guaranty Corporation, which has neither the assets nor the ability to garner them to make good this obligation.

So what happens?

Chrysler goes bust. There's net zero or very close to that to pay secured creditors.

But the US Government has a peculiar position, through the PBGC, and that guides this transaction.

As the only source of funds for Chrysler, the USG can, if they wish, end up with %100 of the equity. That's what a normal investor would do. Instead of doing that, they "purchase" a third party manager (Fiat), and give the Union VEBA much of the USG equity and debt

You can rightly ask: Why would the Government give the Unions this equity, and not the bondholders? And the answer is: because the Government is _already_ on the hook for these pension/healthcare benefits. The transfer of equity to the VEBA, if it amounts to any value, ultimately reduces an offsetting PBGC obligation of the USG.

May 23 04:42 PM

[Teutonic Kn...:]

Re: exchanges between Crocodilian/dfalter -

Crocodilian's explanation seems to make sense only from the government's perspective and interest. I'm not a lawyer. But it still does not make sense to me. It seems the government is using its overwhelming money printing power to circumvent the Law, instead of upholding the Law which is its prime mandate. I see it as two different "things" - one is a PBGC issue and the other a debtor rights issue. My layman view is that in a BK proceeding, the most senior debtors take possession in what is called "Debtors in Possession". They should precede the UAW pension rights. Correct me if I am wrong, please.

May 23 06:06 PM

[henarl:]

Decisions of the UAW are supposedly made for the benefit of the current and retired auto workers (and, unfortunately, for the benefit of union officials).
Decisions of the bond holders are supposedly made for the benefit of investors in 401ks, hedge funds, state and other union retirement funds, and bond funds who rely on them for THEIR retirement (and, unfortunately, for the benefit of the Wall St executives who run these funds).
But decisions made by Emperor Obama are for purely political gain and are, therefore, the most corrupt of all!

May 23 06:57 PM

[Crocodilian:]

On May 23 06:06 PM Teutonic Knight wrote:

> Re: exchanges between Crocodilian/dfalter -
>
> Crocodilian's explanation seems to make sense only from the government's
> perspective and interest. I'm not a lawyer. But it still does
> not make sense to me. It seems the government is using its overwhelming
> money printing power to circumvent the Law, instead of upholding the Law which is its prime mandate.
----------------------...

"The law" does not require the Government to bail out bondholders. The bondholders are _not_ saying that Chrysler has the money to pay them.

If Chrysler's assets were able to satisfy the secured creditors, and they were stiffed, then that _would_ violate the bondholder's security, and the complaints would be correct.

But that's not what's happening. Its not what the bondholders' are alleging is happening either.

Presently, Chrysler's assets are worth $1 - 3 billion (according to the fairness opinion submitted to the bankruptcy court). Moreover, they will deteriorate rapidly if they are not maintained-- which has been done with $1.7 billion of the Government's money so far.

So its clear that there's no way for the bondholders to recover the $6.9 Billion that they're owed. Based on the fairness opinion, 30 cents on the dollar makes a lot of sense. If secured creditors think that they can get more -- they're welcome to bring a competing offer to the table. . . which they obviously haven't done.

Secured creditors _are_ entitled to primacy in a bankruptcy liquidation, but they are _not_ entitled to a bailout. They may want one, but that doesn't mean the law requires that they get one.

May 23 07:15 PM

[dfalter:]

On May 23 07:15 PM Crocodilian wrote:
>Secured creditors _are_ entitled to primacy in a bankruptcy >liquidation, but they are _not_ entitled to a bailout. They may want >one, but that doesn't mean the law requires that they get one.
Noone is asking for a bailout of creditors.

Everything people are asking for is fairness between different classes of creditors with the same kind of legal claim - i.e. the same amount of recovery from the bankruptcy for all members of the legally same class of creditors. Is that really so hard to understand?

It is their legal right to get a share of whatever proceeds (be that in cash, new equity, new debt or whatever) the bankruptcy generates commensurate with the amount of debt they held prior to bankruptcy.

However, what the government has decided to do instead is essentially pay the UAW with money from other creditors to avoid being liable for parts of it under their pension guarantee scheme. If a normal DIP lender did something like that in another bankruptcy, they would become liable for fraud.

May 23 08:21 PM

[casey00001:]

" If a normal DIP lender did something like that in another bankruptcy, they would become liable for fraud. "

I would take it a step further.

I would venture to say that in a normal bankruptcy the DIP would now be putting all the captial given at risk where normally the DIP gets their money back first. However the Feds are never going to get sued for fraud. If a "fair" bankruptcy judge is appointed he may just undue any wink wink, handshake deals.


On May 23 08:21 PM dfalter wrote:

> On May 23 07:15 PM Crocodilian wrote:

May 23 08:35 PM

[Teutonic Kn...:]

Sorry to bother you further, Crocodilian and dfalther at this time of the long weekend when everybody would be lying down at a beach or barbecuing.

Your comments answered some but raised more questions on my ignorant mind. So are you saying that this large-scale bailout has no legal precedent? And that the presiding Judge and the government (I guess it would be chiefly King Barrie the Unready) to call the shots?

If so are we becoming Lawless? And the government is starting to arbitrarily taking away rights?

Part of SA is to listen to opposing views as Dr. John Lounsbury said. Hope you could find a moment to respond.

Thanks,
Teutonic

May 24 01:01 AM

[Crocodilian:]

On May 23 08:21 PM dfalter wrote:

<<"Noone is asking for a bailout of creditors.">>

Yes, actually they are. They are asking the US taxpayer to pay more than their asset is worth. That's a gift to the bondholders from taxpayers that I don't feel like making-- how about you?

<<"Everything people are asking for is fairness between different classes of creditors with the same kind of legal claim - i.e. the same amount of recovery from the bankruptcy for all members of the legally same class of creditors.">>

No one other than secured Creditors is getting _any_ cash out of the Chrysler bankruptcy, and this cash is being provided by the Government, as part of a reorganization plan that its authored.

The secured creditors are free to submit a competing reorganization plan to the judge--they haven't.

@Teutonic Knight
<<If so are we becoming Lawless? And the government is starting to arbitrarily taking away rights?>>

The USG is acting correctly under US bankruptcy laws. The secured creditors are getting what their security is worth. They are free to present a competing plan to the Judge in US bankruptcy court -- they haven't

What _is_ unusual and unsatisfactory here is that the Government has a role in this. A "free market" approach would be: let Chrysler fail and be liquidated under the US Bankruptcy Code . . . its clear that under this scenario, secured creditors would get less than the 30 cents on the dollar that they're receiving under the USG plan.

No rights are being violated, no laws violated: we are no less a nation of laws than a year ago. What we _are_ is a nation whose core industrial and financial companies have proven to be insolvent or bankrupt, and two Administrations, of very different political persuasions, have each reached the conclusion that "letting the chips fall where they may" was simply too dangerous.

You may agree or disagree with that policy choice-- but understand that its a policy choice, not a violation of the law.

May 24 02:55 AM

[Charles Pet...:]

Couldn't be more true. Many years from now this will go into history books and students will wonder why the administration was able to get away with whatever they wanted to without any good economic proof.


On May 22 04:18 PM Karen Consumer wrote:

> "Remember, it is the bondholders who are supposed to be paid first
> during a bankruptcy, they should have the right to protect their
> property given the fifth amendment right to due process under the
> law."
>
> You remember that, I remember that, but the administration doesn't
> care about that. But whom they do care about seems to be in doubt.
>

May 25 11:03 AM

[dybydx:]

last i heard, in terms of raw salary, GM/Chrysler/Ford is pretty much at par with Toyota. But in term of benefit and pension, they definitely go way ahead of Toyota. Add on the fact that GM has a larger retiree-to-worker ratio, the final number works out to $70 to $80 per hr per CURRENT worker.

Larry may be right that hes only PAID "$30/hr", but that is not what GM is PAYING.

The undisputable facts are that GM's financial arrangements are economically unsound. Either they be re-negotiated now, or let the bankruptcy judge do it.

May 25 12:51 PM

[marketman54:]

GM has been upside down for years. They lost $10 billion just a few years ago when the most cars were ever sold. Hell, Toyota sells more Camry's than all the cars Chrysler sells added together.

The auto industry doomed itself. I do not want to pay for these dinosaurs to roam the earth anymore, no one is bailing out my business and I'm making money somehow.

These unions knew that these companies were losing money hand over fist for years and now they cry wolf and want to put their grubby hands in my pocket to bail them out - FORGET IT.

This is no suprise to anybody. Let them fail. Let some foreign company enter our market and let these people work for whatever the going wage is, if they can find a job.

I am already a tired American, I don't want to be a broke American and support these blood suckers the rest of my life.

May 25 04:41 PM

[1 of 4:]

Unions are nothing more than an artificial restraint on the supply of labor. In a world economy, labor reliant manufacturing is easily exported to regions of lowest cost, thus defeating the geographically local artificial restraints imposed by unions. In simple terms, labor unions kill themselves. Figure it out or die.


On May 22 07:44 PM Larry M. wrote:

> A year ago .... before Wall Street Collapsed GM was I believe about
> $40 per share. Obviously the Collapse (Combined) with all the Wall
> Street GM Bashing by it's Investment Bank Ratings Agencies has Crashed
> the Broader Economy and took the Auto Industry down the Tubes.<br/>
>
> I Charge that Wall Street has Successfully Bashed GM into the dust
> for the Express Purpose of Destroying the Last of the great Manufacturing
> Labor Unions. This WAS Deliberate as such is Criminal to Deliberately
> Damage and Destroy the Economy of The United States of America.
>
>
> And that my Fellow Americans Deserves Prison Time for Economic TREASON
> agianst The United States of America by Several Wall Street Banks
> and their Ilk the CFR, the TC and the (Private) Fed Bank.

May 25 09:56 PM

[Tranquilmed...:]

Show me a business with a strong union and I will show you a business ready to go under.

May 26 12:22 AM