Bondholder face-off GM’s next challenge

Tuesday, May 26, 2009

Bondholder face-off GM’s next challenge

Robert Snell / The Detroit News

The most important week in General Motors Corp.’s history starts with a crucial labor meeting today, includes a showdown with bondholders and could be capped by one of the largest corporate bankruptcy filings ever.

The next seven days serve as the third act in a six-month drama that has fascinated the nation and included the grilling of auto executives on Capitol Hill, the government-mandated ouster of Chairman and Chief Executive Officer Rick Wagoner and plummeting sales and stock price tarnishing an iconic company now teetering on the brink of bankruptcy.

Developments were under way Monday, even as most of America celebrated a day off work.

A person familiar with the matter said the U.S. Treasury was preparing to lend GM about $30 billion in debtor-in-possession financing and exit financing, which would bring the total the government is extending to the automaker to about $50 billion, including the $4 billion GM received Friday.

GM isn’t expected to seek bankruptcy protection until June 1 at the earliest, the person said.

The four weekdays leading up to a June 1 restructuring deadline will determine GM’s short-term fate and shape its long-term future.

"From this wreckage is going to emerge a new GM," said analyst Joe Phillippi of AutoTrends Consulting Inc. in Short Hills, N.J.

Vote results expected this week

Today, United Auto Workers national leaders are expected to meet in Detroit to discuss money-saving concessions that include cutting jobs, closing plants and restructuring payments into a health care trust. Local UAW workers are expected to start voting immediately afterwards with the expectation the results could be finalized by the end of the week.

Meanwhile, thousands of unsecured bondholders have until 11:59 p.m. to decide whether to swap $27.2 billion in debt for a 10 percent stake in a restructured GM.

"Both the UAW agreement and bondholder exchange are very important events as we restructure the company," GM spokesman Tom Wilkinson said.

Analysts and industry experts said they expect GM will be unable to lure enough bondholders, who have complained the offer is unfair, considering the UAW and the U.S. Treasury Department, which has lent the automaker $15.4 billion, would be awarded 89 percent of the equity in a restructured GM.

Small individual bondholders have rallied against the offer, and an ad hoc committee representing some of GM’s largest bondholders have rejected it and countered with a proposal that would give them a 58 percent stake in the company.

Current shareholders would get just 1 percent of the equity in GM.

Unless the Detroit automaker can get 90 percent of bondholders to accept the offer, GM is expected to file for Chapter 11 bankruptcy in federal court — which President and CEO Fritz Henderson has said is probable.

"It’s pretty much a foregone conclusion that we’re going to have a bankruptcy," Phillippi said.

Another sign of a probable bankruptcy: Chief Financial Officer Ray Young last month said the automaker does not expect to make a $1 billion debt payment by June 1. Young said GM likely will miss the payment because the bond exchange offer to bondholders might still be pending June 1 — though there have been no indications the Tuesday exchange deadline will be extended.

Chrysler serves as model

On May 14, GM said in a regulatory filing the most likely bankruptcy option involves splitting off its good assets and leaving the bad assets in federal court — an approach being used by rival Chrysler LLC.

By using Section 363 of the federal bankruptcy code, which could allow for a relatively quick sale of assets, a new GM could emerge from federal court without the burdens of retiree health care liabilities or $27 billion in bond debt.

The automaker also must finalize its deal to swap about $10 billion of what it owes the Treasury Department for at least 51 percent of its common stock.

Though no details of the union agreement were released, GM wants to swap, for stock, at least half of the more than $20 billion the UAW is owed for a trust fund that takes over retiree health care benefits next year.

The health care trust is a voluntary employees’ beneficiary association, also known as a VEBA.

The union agreement is a crucial piece of GM’s restructuring plan aimed at cutting costs, but it also could protect the UAW against worse cuts if GM files for bankruptcy and a judge rewrites a 2007 labor contract.

‘There were few options’

However, it is likely a judge would honor an agreement reached between GM and the union before the automaker files for bankruptcy, experts have said.

"I suspect it was a tough agreement for the UAW, but there were few options," said Harley Shaiken, a labor expert at the University of California, Berkeley. "I think it would be misleading to say (ratification) will be a slam dunk. But UAW members are realistic.

"A lot of people will be swallowing hard, but I think you’re likely to see a ratification."

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