As bankruptcy looms, UAW and creditors face bigger hits

As bankruptcy looms, UAW and creditors face bigger hits

Peter Brown

Automotive News | April 6, 2009 – 12:01 am EST


DETROIT — The Obama administration has demanded that General Motors get financially healthy in 60 days — or else.

That demand is likely to force the UAW and the company’s unsecured bondholders to take much bigger hits than they were discussing in March.

"We need to go deeper, we need to go faster, to have a clean balance sheet," GM CEO Fritz Henderson said Friday.

At bottom, that means creditors will have to forgive tens of billions of dollars more of what GM owes them if the company is to avoid bankruptcy in June.

Henderson’s lever: Bankruptcy could wipe out all of the $27 billion in debt to unsecured bondholders and the remaining $20 billion owed to the UAW’s Voluntary Employees’ Beneficiary Association, or VEBA — the fund to cover retirees’ health care. The bondholders and UAW are subordinate to secured debt holders and the U.S. government.

More sacrifice needed

Both the bondholders and union balked at debt-for-equity swaps as GM prepared its viability report for the government. Failure to reach agreement was a major factor cited by the president’s auto task force in rejecting GM’s viability plan.

The haircut that GM had offered the bondholders before last week: Cut the debt by two-thirds by accepting GM stock to cover a tiny portion of the reduced debt. For the UAW, the offer was $10 billion in debt and the other $10 billion in equity. The UAW declined to comment last week.

If such a deal is done, the bondholders and UAW will be majority owners of GM, Henderson acknowledged.

"What we made clear was that the criteria that were used before — whether it was two-thirds reduction in unsecured indebtedness or 50 percent equitization of the VEBA — implicit in the findings was that that’s not sufficient," Henderson told Automotive News.

As an example, Henderson talked about a hypothetical bond of $1,000. The offer to bondholders had been $333 in continued debt, plus equity.

Since Obama’s announcement March 30, Henderson said, "The same $1,000 bondholder, instead of getting $333 in debt and some stock, now you’re going to get $100 of debt and more stock, or maybe you get no debt and more stock. That’s the nature of the negotiation."

Under water

If, by Obama’s 60-day deadline, GM doesn’t have a clean balance sheet, the company will be forced into Chapter 11 protection from creditors, Henderson said.

"If there’s not an expectation that that [clean balance sheet] can happen, we’re going to go into bankruptcy to get it done," he said. "That’s what was clear this week."

A clean balance sheet — where liabilities are in line with assets — will require the elimination of many tens of billions of dollars of debt. GM’s consolidated balance sheet as of Dec. 31 was deep under water. It showed liabilities, primarily debt and retirement liabilities, of more than $176 billion and assets of just over $91 billion.

Asked how deep the VEBA cuts might go, Henderson responded: "I would say there’s nothing off the table.

"Whether it’s the VEBA or the debt, the answer is we’re going to have a clean balance sheet when we’re done. We’re going to try to negotiate with all the parties. I actually think it’s going to involve deeper moves everywhere." 


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