GM, in Game of Chicken, Steps on Accelerator
GM yesterday announced the latest version of its restructuring plan, which the government has demanded by the end of May. The plan goes into considerable detail on the steps being taken to eliminate brands and reduce the overall cost structure in line with a projection of a U.S. market of only 10 million cars sold per year. However, the main issue facing GM in its efforts to avoid bankruptcy is its balance sheet, and so its announcement is more a negotiating gambit than a solution.
GM currently has $27 billion in unsecured debt, about $20 billion in obligations to the Voluntary Employee Benefit Association for health care benefits, and at least $15 billion in loans from the Treasury Department. The goal, according to today's plan, is to reduce that debt by $44 billion. The provision that has gotten the most attention is the conversion of at least half of the Treasury debt to equity, in exchange for a 50 percent stake in the company's common stock. In that negotiation, GM will be aided by Treasury's independent desire to see GM survive without the risk of bankruptcy. Dealing with the private bondholders will be another story.
As part of the restructuring plan, GM announced a bond exchange program under which bondholders would get common shares currently worth about 41 cents for each $1 in bonds they exchange. GM had been negotiating with some of the banks that own large amounts of its bonds; but in a conference call for bloggers yesterday afternoon, chief finance officer Ray Young said that this was no longer a negotiation. "The offer is on the table," he clarified. Bondholders are free to "express their opinions" about the offer. But ultimately, he said, they have to decide whether they want to take the 41 cents in common stock or risk a bankruptcy proceeding in which they might or might not get more in cash.
This, of course, is the latest round in an ongoing game of chicken between GM and Treasury on one side, and the bondholders on the other. While the debt-for-equity offer may in fact be better than what the bondholders might expect from a bankruptcy court, they are betting that at the last moment the government will swerve, because it does not want to take the risk of bankruptcy and everything that might mean for GM's workers and suppliers. So GM's only hope of getting 90 percent of bondholders to agree to the exchange is being able to threaten credibly that this is their last, best, and final offer. It's a little like selling a car.
As far as selling cars is concerned, Young said that GM is not projecting a return to 2006-07 sales levels until 2014. Given that cars break down, and that most working Americans need cars in order to get to work, this is a reasonably pessimistic forecast, and if GM can get its cost structure down to the 10 million-car level, it should stand a reasonable chance of surviving. The question is whether GM will get that chance.
Posted by: wmboyd | April 28, 2009 8:19 AM | Report abuse
Posted by: mark631 | April 28, 2009 9:17 AM | Report abuse
Posted by: jdcw | April 28, 2009 9:42 AM | Report abuse
Posted by: artg | April 28, 2009 10:16 AM | Report abuse
Posted by: jdhwp | April 30, 2009 10:28 AM | Report abuse
The comments to this entry are closed.