GM has released its latest never-never financial plan for an imaginary future where the bondholders evaporate into clouds of fairy dust, while American consumers mob its dealerships, begging for a piece of the GM dream. The company is apparently planning to ask a bankruptcy judge to enforce the same bond exchange terms it's currently offering its bondholders. If GM gets its wish, the bondholders will do better by settling out of court, because they won't have the administrative costs of a bankruptcy, which are typically high.
But that's a big "if". The terms are hardly overly generous: they're offering to exchange $27 billion worth of debt for about a 10% stake in the company. The firm's whole market cap is about $1.25 billion, and it looks like its 5-year average EBITD is somewhere in the neighborhood of $400 million. These are less than encouraging numbers--the analysts contacted by most news sites seem to be valuing this deal at pennies on the dollar. Meanwhile, the UAW is being asked to exchange $10 billion in health care obligations for a 39% stake.
That's not quite as breathtakingly lopsided as it sounds at first glance; workers, being needed to keep the company going more than bondholders, tend to get relatively generous treatment by a bankruptcy court (and conservatives winding up to say they should just fire the UAW and replace them with scabs should go look at some OB literature. Firing all the plant workers would probably kill the company, which is in no shape to train an entirely new workforce.) Still, bankruptcy judges are rarely that generous--if they were, companies would have a mighty hard time floating bonds. Presumably the government is supposed to quasi-impose those terms as a condition of its debtor-in-possession financing.
But can it make a credible committment not to provide DIP? The problem with this deal, as with the attempted Chrysler throwdown, is that the creditors would probably be better off in bankruptcy court even if the company was straight-out liquidated and its equipment sold off to other car companies. Since the government is plainly not going to let that happen, this has the feel of an empty gesture.
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A I reading this right? 10% of $1.25 billion in exchange for $27 billion in debt? That 0.005 cents on the dollar, is it not?
Not necessarily--presumably the restructured company would be more profitable, so the shares should be worth more.
Also, it's 0.005 as a proportion, which is half a cent on the dollar. Still terrible, of course, but a hundred times better.
[T]he creditors would probably be better off in bankruptcy court even if the company was straight-out liquidated and its equipment sold off to other car companies.
If anyone could refer me to a back-of-the-envelope calculation on this, I'd be grateful. (This statement may well be true, but my gut feeling is that a fire sale of GM's assets at this point wouldn't bring in much at all.)
To my understanding, GM has huge amounts of assets - those car factories still have value, even in this market. They're in hock up to their smokestacks, of course, but that's where a lot of the creditors are sitting - there's a lot of people holding GM mortgages and not GM bonds. I can't imagine that so much of the money is gone that less than 10% of their debts are backed by hard assets, even at fire-sale prices. Of course, this depends on how the hypothetical liquidating bankruptcy judge divvies the loot, but my top-of-head calculations agree.
I just ran the numbers and it looks like GM’s bondholders would get 0.46 cents on the dollar and the UAW would gets 4.88 cents on the dollar in exchange for the debt and health care liabilities respectively. I’m not sure what the federal government’s take would be as I’m uncertain how much the taxpayers have paid so far and would pay in the future to keep GM solvent.
Hmmmmmm
http://corner.nationalreview.com/post/?q=N2U2YTYyZTdhODc4NTEzMjcyYWJmNWExYzcwYTlmNmM=
"The GM bondholders own $27 billion and they’re getting 10 percent of the common stock in an expected exchange. And the UAW owns $10 billion of the bonds and they’re getting 40 percent of the stock."
So the UAW now has a big big stake in the direction of what is left of GM???????????????????????????????????????????????????????????.
And this:
http://www.detnews.com/article/20090428/AUTO01/904280379/UAW+closer+to+stake+in+Chrysler
"Local United Auto Workers leaders representing 25,000 Chrysler LLC workers unanimously approved concessions Monday night that could give a union-run trust 55 percent ownership of a restructured Chrysler"
...black is white, white is black.
The govt gets a 50% equity stake in exchange for forgiving $10b in loans.
So, you have:
Govt: ~50% equity for $10b in forgiven loans.
UAW: ~40% equity for $10b haircut on promised health care funds.
Bondholders: 10% equity for $27b haircut on secured debt.
So the company is being split up in order of who can screw them over most effectively. Surprisingly practical, really.
There are going to be some serious consequences for the actions being put into place in these cases. If I were funding corporate borrowing, I would have to add to the risk premium based on the fact that "collateral" (both the physical plant and the intrinsic value of any reorganized company) isn't as much as you think it was before.
Sounds to me like GM is finished even if its rescued. No one in their right minds will ever loan them a cent.
I don't know, GM was in similarly bad credit shape and on the verge of bankruptcy in 1920. It's amazing how much 5 years and a healthier economy can turn around a company rapidly; investors have a short memory once a company starts generating profits after a (very) bad spell.
Not to say it is certain this will happen to GM, but it is a possibility.
GM didn't have a lot of competition in 1920. They do now--with better quality products too (Honda and Toyota). I for one will never buy a car from a company that took bailout money. Seems like a bad risk.
No one in their right minds will ever loan them a cent.
The responsible adults currently in charge of taxpayers money?
</sarcasm>
What's good for GM is good for the USA!!!
Yeah, I thing Max is correct. People not in their right mind have access to a seemingly unlimited amount of other people's money to lend to GM and Chrysler.
Competency hearings! I demand that they prove their mental fitness.
I would have to advocate that GM and Chrysler be boycotted by consumers. You can buy Ford products, but with the subsidies to their competitors, they are not going to make it long without bankruptcy themselves unless consumers act appropriately.
That's my plan. I will never buy a Chrysler or GM vehicle. It's unlikely that I would have previously, but I'm simply never going to buy products from an entity that's essentially stolen my money. I've canceled my BoA credit card as well.
"That's not quite as breathtakingly lopsided as it sounds at first glance; workers, being needed to keep the company going more than bondholders, tend to get relatively generous treatment by a bankruptcy court"
The UAW obligations are not going to *current* workers. They are for retirees. Retirees would not seem to me to be "needed to keep the company going".
To be sure, some of today's workers may *become* retirees in the future - assuming they stay long enough on the job to get the benefits and, well, the company continues to exist for that long. But, still, they are not the same thing.
I totally agree with Alex S.
Doesn't the logical bankruptcy plan for GM involve dumping the current retirees onto Medicare? The retirees are not, after all, building cars.
(and conservatives winding up to say they should just fire the UAW and replace them with scabs should go look at some OB literature. Firing all the plant workers would probably kill the company, which is in no shape to train an entirely new workforce.)
Firing the workers != getting rid of the union. The workers are hardly in a position to go elsewhere, so they could presumably retain most of them after rejecting the union contract. The Bankruptcy Code provides a mechanism explicitly for this purpose: http://www.abiworld.org/wiki/usc_sec_11_00001113----000-.html
The Obama Administration won't let them cut the unions loose, and they're ultimately calling the shots.
Does anyone know how the airline unions and and airline bondholders were treated vis-a-vis each other, that would be a comparable benchmark.
The airline unions- particularly the pilots- took huge haircuts, especially in pensions. Again the haircutees were hardly in a position to go elsewhere. But the UAW, like the public employees unions, exists not to serve but be served.
The company should be liquidated and the employees can come back and apply for their old jobs at some realistic wage.
If GM gets its wish, the bondholders will do better by settling out of court, because they won't have the administrative costs of a bankruptcy, which are typically high.
I have read the suggestion that some/many of the bondholders may also own bond-insurance (credit-default swaps) that would give them 100 cents on the dollar if GM defaults (depending on whether they are fully or fractionally covered of course). I'm guessing that swaps would not pay off on a "voluntary" haircut.
How is it the moral equivalent of a Hail Mary pass?
I guess you could say both things are morally neutral events, but I don't get it.
They're both based on mostly hope, but how is that moral?
Unless you're implying that both events presuppose the existence of God, and belief in God is a morally good thing. I don't know, maybe it's the equivalent of a Hail Mary pass, but I guess I never viewed Hail Mary passes in moral terms.
Strictly, this is a step in the right direction for GM. At least at this point they're starting to propose operational cuts that make survival (plant closings, layoffs, dealership consolidation, etc.) a remote possibility. Until now, all they've offered up is screwing the bondholders and hoping God would intervene to turn around their operating losses. Of course, at this point, I've yet to see any evidence that they have any plan to implement these operating cuts. That's not a trivial matter. How they expect to get around state laws discouraging shutting down dealers is not at all clear. How they plan on getting much cooperation from the unions after they've had to lay off thousands of members is left unsaid. How they get the political class to go along with seeing plants in their districts shuttered remains to be seen. But, it's a start.
Simple arithmetic is available to raise questions.
Questions which show we are not beyond the smell test on economic policy yet.
The Hail Mary ends:
"Pray for us now and at the hour of our death."
Perhaps GM is at the hour of its death.
"The problem with this deal, as with the attempted Chrysler throwdown, is that the creditors would probably be better off in bankruptcy court even if the company was straight-out liquidated and its equipment sold off to other car companies."
In the event of a liquidation, what kind of market is there among other car companies for GM/Chrysler equipment? I would think the equipment itself would be sold for pennies on the dollar if it could be sold at all.
Michael,
The company's assets are some of the brands, too. Parts of GM have been profitable just within the last year. This is an argument for a reorganization to a smaller firm, but what is happening right now is an attempt to steal from the bondholders those profitable/potentially profitable pieces of the company. The bondholders would have to be complete fools to agree to this deal as it now stands. If the government wants to do this, make them do it face up by force- don't just concede the point.
In Soviet America, the united auto WORKERS will own the means of production!