The United Auto Workers (UAW) has reached a deal with GM management and the government. Details are yet to be released, but if it's anything close to what's been discussed in the media, it pretty much guarantees GM will file for bankruptcy on or before June 1, when a $1 billion debt issue comes due.
Pictures tell the story. First, who GM owes money to:
Next, the proposed ownership of the new GM, reorganized out of court:
But this doesn't quite tell the whole story. In exchange for 39% of GM, the union has to relinquish only half of the company's obligation to the retiree health care fund.
So the union gets 39% of the company in exchage for $10.2 billion of debt, while the bondholders get 10% of the company in exchange for $27 billion of debt. Meanwhile, the government, which added more than $15B of debt to GM's mortally wounded balance sheet, would take 50% of the company. Why? A GM bankruptcy was thought to be potentially devastating to confidence at a time when the economy was teetering on the edge of disaster. If the problem was a bankruptcy at that time (as opposed to now, when most appear resigned to this outcome), has not the government already been compensated through the elimination of that risk?
Look at it this way: would the government make those loans under today's circumstances? The seizure of essential credit markets has been largely reversed, confidence levels have improved, financial markets are relatively stable, and there are bits of encouraging data where six months ago there were none. Has the calculus changed enough so that the government would just let GM fail and instead work on recovery? If the answer is yes, then the government should be taking none of the reorganized company; it was quite literally buying time for an economic recovery and has been paid in full.
The real answer is probably in the middle; at least part of the reason the government lent GM the money was to abate systemic risk. As such, at best, the government could be on equal footing with the bondholders. In its proposal, however, it would receive nearly nine times as much for its debt as the bondholders would receive for theirs.
Put visually, here's the cost under this proposal for 1% of the new company (the amount left to existing shareholders, who will be wiped out completely in the bankruptcy):
||Debt Exchanged||Share||Cost in Debt per 1%|
|UAW||$10.2 billion||39%||$261.5 million|
|US Government||$15.4 billion||50%||$308.0 million|
|GM Bondholders||$27 billion||10%||$2,700.0 million|
According to all reports, the debtholders are unlikely to approve a deal in which they receive less than 1/10th the consideration of the union. Why would they? Are they really likely to receive less value from a bankruptcy court?
Personally, my bit is small enough that I will gladly take that chance, in no small measure so that I might stick my finger in the eye of the UAW.
Disclosure: Long GXM