I'm struggling to understand how the government thinks that it can get GM in and out of bankruptcy in the blink of an eye. In a "prepackaged" bankruptcy, where there's substantial agreement among the parties, that may be possible. But neither the unions nor the bondholders show any signs of making generous concessions in order to get the other parties to agree. If the government wants to make labor happy--and it seems it does--it can either pay off the bondholders to go away happy, or it can wait for the thing to snake all the way through the bankruptcy courts. That generally takes more like a year than the "weeks" I've heard claimed.
There's no doubt that ultimately the bondholders are going to take a big, deep haircut in bankruptcy. But the fantasy where they quietly accept it while the court crams everything desireable into one company, while leaving a few paperclips and the healthcare obligations behind for the creditors, seems . . . extreme. Indeed, I don't think the government believes it either. I think they're just pretending too, so they can act all horrified and sad when it turns out that the UAW has to make some concessions too.
But I don't expect either group to make concessions outside of bankruptcy, even if they'd be better off not going before the court. Each side seems to believe for its own good reasons that someone else has the moral responsibility to bear most of the pain. They won't take a barely decent deal if it means someone else gets a better one.
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I thought the implicit threat was no debtor in pocession financing if the initial concessions weren't large enough.
UAW is the one who needs debtor in possession financing more than the bondholders. If they don't get DIP, they have to shut down operations totally. The bondholders will probably lose a bit more money than if they got financing to continue operations, but the UAW would be destroyed in one fell swoop.
No DIP means the UAW isn't just losing their contract terms, it means they're all fired, at once, with no compensation and very poor outside job prospects.
Per Bloomberg http://bloomberg.com/apps/news?pid=20601109&sid=a3IsAywFeD_s&refer=home
Seems that the plan is to give the bondholders a "sliver" of equity and give the unions much more. If the government is successful in doing this it will have negative long term consequences for bondholders and the debt markets. If senior bondholders can be stripped of all of their rights and property via 363 sales it will result in higher borrowing costs for companies.
it will result in higher borrowing costs for companies.
Not all companies. It just means higher costs for companies with politically powerful unions. A "union surcharge" if you like.
That should have interesting long term effects.
The suppliers need the DIP more than the UAW. If GM goes bankrupt without the DIP, it won't be able to pay its suppliers. In turn the vast majority of suppliers would then go bankrupt. This in turn would likely lead the suppliers to being unable to supply Ford, the transplants.
What I'm not 100% sure is who, exactly, funds the VEBA to the union. The bonds are obligations of General Motors Corp and are unsecured. However there are dozens of legal subsidiaries and if the contracts are with the subsidiary companies these contracts could effectively rank senior to the bondholders. The bondholders of course can argue that GM and its subsdiaries are one legal entity and should be substantatively consolidated in the bankruptcy.
Bottom line is that GM will be owned by the bondholders and the banks (with I think some warrants to the taxpayer). They are haggling over the percentages. I'd expect it to be prorata to the amount of debt they are forgiving which would seem fair. We'll see.
So if the Union is forgiving $15Bn and the bondholders $30Bn they should get 1/3 and 2/3rd of the equity.
BTW in may markets outside the US it is pretty clear that employee entitlements have a priority ranking in default. In Europe, Australia this would be a non issue as the union (and non union for that matter) would have priority over the bondholders (but not a priority over the secured lenders).
I think UAW needs the DIP just as much as the suppliers. Lack of DIP is an existential question for both of them. If GM can't get DIP credit, both UAW and the suppliers lose their positions completely.
The problem for the suppliers is that for the most part, they have very little say at the bankruptcy court. Their only claim is junior debt on parts delivered. UAW has much more claim in court, but would still probably lose to the bondholders.
The 363 sale is an attempt by the government to give the suppliers and UAW both more clout than they currently have.
Ms. McArdle,
No disrespect, but I think your analysis is way too generous. GM loses money on its operations. That's before paying a brass farthing to the bondholders. There's an exceedingly slim possibility that shortfalls could be made up by squeezing the dealers, but that opens a whole can of worms with state protections for auto dealerships. So, even in the fantasyland scenario (I'm not accusing you of this) that GM bondholders agree to go gently into that good night, unless GM realizes some pretty substantial operational cuts (and there's no way this doesn't leave the UAW with substantial losses), any Chapter 11 is pretty much doomed to become a Chapter 22.
There's no doubt that ultimately the bondholders are going to take a big, deep haircut in bankruptcy.
What about the bondholders that hold credit-default swaps that pay only IF GM goes into bankruptcy? In their case, bankruptcy is the one way that they avoid that haircut, isn't it?
http://www.businessinsider.com/aig-is-driving-gm-into-bankruptcy-2009-4
This is an interesting point.
It reminds that there is another way to look at a CDS other than as insurance. AIG has in essence purchased the bonds using money borrowed from the nominal bond-holder. AIG pays interest to the nominal bond-holder on this loan. The nominal bond-holder holds the bond as collateral and returns to AIG the interest payments on the bond. Since AIG has/had better credit than GM, AIG pays a lower interest rate, and thus there is a net payment from the nominal bond-holder to AIG. If GM defaults, then the nominal bond-holder just calls in its loan to AIG, AIG pays the principal back to the nominal bond-holder, and the bond-holder pays back to AIG any partial recovery from GM.
This is a long winded way of noting that AIG is the economic bond-holder in this circumstance, but AIG presumably is unable to negotiate with GM as a bond-holder.
The bondholders think they can get a lot of money by auctioning off the factories and inventories. A lot more than the 15 cents on the dollar Obama wants them to take. GM has a lot of STUFF; facilities, patents, paper products, office chairs, whatever.
The bondholders have no reason to take a haircut when there is that much value in the company.
But the plan is to have Old GM declare chapter 11, and sell the viable brands/technology/factories to a new corporation, New GM. The creditors can't complain about this as long as the $ paid (w/ govt. money) is a fair price for the stuff. New GM then scampers off selling Malibus and Camaros all the live long day.
Then Old GM will go chapter 7 and get liquidated. Probably with lots of govt. money to top of VEBA and make good any pension shortfalls.
GM is dead, long live GM.
If you want peace, prepare for war. If you want the negotiating parties to get serious, prepare a bankruptcy petiton, put it in your briefcase, and start walking down to the courthouse...