AFSCME 3357-HOF'S BLOG

The Week of the Plan

Tomorrow is the big day - General Motors (and the others but the action is with General Motors) is set to deliver its plan for the government bailout money. Because Congress actually demanded something akin to a business plan to get the billions of dollars, Rick Wagoner's crew will actually have to show up with something on paper that can convince a halfway reasonable person that maybe, GM has a path out of its financial mess. Because Wagoner is dead set against a Chapter 11 bankruptcy, you can expect that GM will come up with something that does not propose a C-11.


News sources have been masters of the obvious, and not necessarily in agreement regarding what the plan will include. I'll go over some highlights. On Wednesday (Nov. 26), Bloomberg News reported that GM was considering killing off Saturn, Saab and Pontiac. This would be in addition to Hummer which it already said it would kill or sell. Personally, I think GM may eventually kill brands, but with the possible exception of Saab, they're not going to announce it tomorrow. For one thing, when GM eliminated Oldsmobile, it took billions of dollars in cash to pay off the Oldsmobile dealers. Although some domestic dealerships are valued at zero now, it would still take billions of dollars to kill brands unless they went through bankruptcy court and broke the franchise agreements there.

On Friday, the Wall Street Journal reported that GM is negotiating with creditors to exchange debt for equity. The article cites JP Morgan for the assertion that GM has $43 billion in debt outstanding for an annual interest expense of $2.9 billion. It's not clear whether that includes the $10 billion or so that GM owes the UAW for the retiree health care VEBA, but it looks to me like it doesn't. It doesn't take a genius to figure that all of this debt isn't going to get paid down by the $10-15 billion that GM would get from a $25 billion federal industry bail out. It would be completely impossible to negotiate this debt except that the current creditors may have not spent anything close to the face amount to acquire the debt. GM bonds are trading for about 10 cents on the dollar. An unknown portion of this debt has traded hands to hedge funds that are speculating on the future of the company, including a buyout, and may just be looking for the right deal in a debt to equity swap. It seems to me that prearranged negotiations on debt are essential to getting anything through Congress, but it's going to be hard to make the numbers work without almost complete cooperation; and the debt may be in too many hands to make that workable even if the creditors aren't outright hostile.

The most persuasive plan that I've seen so far is one by bankruptcy lawyer Richard N. Tilton that was published at thetruthaboutcars.com on November 25. It's a detailed argument on why GM must go through a Chapter 11 prepackaged bankruptcy. Tilton proposes a prepackaged Chapter 11 bankruptcy with the government providing $40 billion in debtor-in-possession financing. Here is Tilton's pro-forma (projected) balance sheet for GM post-bankruptcy:

GM’s Hypothetical Post-Reorganization Balance sheet

Projected Assets: $90b

Estimated Liabilities
$4.4b: existing secured line of credit
$10b: secured term note to US Treasury
$12b: secured term note to the Department of Energy (GM’s share of the DOE funds for alternative vehicles)
$1b: trust or secured letter of credit established to guarantee payment of consumer warranty claims
$2b: current tax liabilities

Subtotal: $29.4b of secured and priority claims

$9b: accrual for consumer product warranty liability
$10b: for current claims arising in during the Chapter 11 case which will be paid by GM in the ordinary course of business
$5b: new unsecured debt (payment in kind) set aside for miscellaneous claims, with maturities deferred and no cash interest payment
$5b: subordinated debt, issued with laddered maturity dates timed to fund the retiree trust only if it runs out of money in the future
$15b: accrual for pension and retirement obligations for current employees
$5b: leases and other obligations, including liabilities to foreign subsidiaries

Subtotal: $39bof unsecured debt and unsecured liabilities

Total estimated liabilities: $78.4b

Equity distribution

90 percent of newly issued GM common shares distributed to bondholders, the retiree trust, and other unsecured creditors
10 percent of new equity reserved for the US Treasury.