By Don Miller
The next chapter in the history of General Motors Corp. (NYSE: GM) is likely to be about bankruptcy. And that would leave the U.S. and Canadian governments as company's majority owners.
The largest of the U.S. Big Three automakers yesterday (Wednesday) announced that it failed to persuade the required 90% of its bondholders to swap $27 billion in debt for stock, pushing the venerable GM several steps closer to a bankruptcy filing.
The rejection by bondholders is the latest chapter in the ongoing saga of GM's desperate attempts to reorganize as it faces a government-imposed Monday (June 1) deadline to restructure or file for bankruptcy.
In recent days, the company struck a deal with its United Auto Workers (UAW) union on payment terms for $20 billion of debt in a retiree healthcare trust, and it successfully convinced the union to take a reduced stake of common stock in the new company.
GM also is still in negotiations to sell its European Opel and Vauxhall units to a consortium of bidders. Those talks were scheduled to continue in Berlin last night, as German and U.S. government officials met with representatives from three prospective new owners.
Still, the odds now favor what would be one of the biggest Chapter 11 cases in history, as the global auto giant that has been an icon of American culture since the early 1900s will likely follow Chrysler LLC into bankruptcy court.
Last Hope Bond Offer Fails
In what was seen as GM's last best hope to cut debt outside of a government-financed bankruptcy, bondholders rejected the company's offer of 225 shares in a restructured GM for each $1,000 of principal - the equivalent of 10% of the new company for their $27 billion in debt.
The principal amount of notes tendered was "substantially less than the amount required by GM" and, as a result, "the exchange offers will not be consummated," the company said in a statement.
The news was no surprise to many analysts.
Bankruptcy is "imminent," Pete Hastings, a fixed-income analyst at Morgan Keegan & Co. in Memphis, Tenn., told Bloomberg News.
"It's no surprise at all that a deal that was as unattractive as this one would be soundly rejected," said Hastings, who had recommended that his clients refuse the exchange offer.
Some analysts blamed the offer's failure on the unyielding stance of U.S. President Barack Obama's auto task force, which had a hand in deciding the terms of any deal made with the debt holders.
"I think the task force made that hurdle so high, they wanted them to go into bankruptcy, they see that as the solution," independent auto industry analyst Erich Merkle told Reuters.
Others saw GM's long history of mismanagement and failure to respond to market conditions as the primary culprits.
"I think the exchange offer was really a transparent attempt to blame bondholders for the bankruptcy rather than to accept responsibility for years of mismanagement and failure to anticipate things that should have been understood," Richard N. Tilton, a restructuring analyst at Covenant Review LLC, told Reuters.
The New "Good" and "Bad" GM
A GM bankruptcy is likely to involve so-called "debtor-in-possession" financing so it can continue daily operations as it is divided into a "good" and "bad" company by the bankruptcy court.
The "good" GM would include the company's most successful operations, including the Chevrolet and Cadillac brands, and within months would exit bankruptcy in sound financial health. The "bad" GM would be left with such laggard brands as Pontiac, Hummer and Saturn, and other liabilities that would be divested in a lengthier court-supervised reorganization.
The U.S. government is expected to increase its ownership stake in GM from its current 50% to as much as 70% in order to slash debt and will lend the new company almost $30 billion, The Washington Post reported last week, citing sources familiar with the matter. That's in addition to the $19.4 billion the United States has already invested. Canada is expected to lend GM an additional $9 billion for a smaller ownership stake in the company, sources familiar with the talks told The Post.
When all these financial packages are included, the GM bailout will have a sticker price of about $60 billion, making it one of the largest - and most costly - rescue and reorganizations in corporate history. When it's finalized, the United States and Canada would own almost three-fourths of GM, the newspaper said.
Despite the vote, bondholders would be left with a 10% equity stake in the reorganized company and current shareholders would own about 1%. As much as 20% could go to the health-care trust fund for union retirees.
Chrysler Bankruptcy Paves the Way
Ironically, Chrysler's swift journey through the bankruptcy process may be a major factor in inducing GM to steer its way into Chapter 11.
Chrysler appears to have made great strides towards a successful restructuring and may be ready to emerge from bankruptcy as early as next week, Bloomberg reported, citing an anonymous source. That would be well in advance of the 60-day upper limit announced at the time of the filing on April 30.
Chrysler has asked a bankruptcy judge to let it sell most of its assets to Italy's Fiat SpA (ADR OTC: FIATY) in order to avoid liquidation. Up until now, the judge in the Chrysler case has signed off on all elements of the company's simplified bankruptcy process that calls for Fiat to take a major equity stake. The deal is still opposed, however, by some of the automaker's dealers, bondholders, and former employees.
But consumers apparently are buying into President Obama's pledge to keep Chrysler alive, as the automaker's sales in May were about even with those from April. That could mean shoppers remain optimistic about the viability of factory warranties and dealer services if GM enters the same process.
"The government has showed that it's going to put its muscle behind this," George Magliano, director of automotive research for IHS Global Insight Inc. (NYSE: IHS) in New York, said in a Bloomberg Television interview. "They don't want a long bankruptcy. They want to get it in, get it out to minimize the impact of a long bankruptcy."
Jeremy Anwyl, chief executive of automotive research firm Edmunds.com, told Reuters that "a few months ago, the idea of putting a major automaker into bankruptcy raised fears of things spiraling out of control, but the Chrysler bankruptcy seems to be going well, so right now the idea of bankruptcy seems a lot less frightening."
GM Bankruptcy More Complex and Risky Than Chrysler's
A GM filing would be far bigger and more complex than what Chrysler is attempting.
For one thing, GM's bankruptcy would take longer than Chrysler's, simply because it is a larger company. GM employees 244,500 people, compared with 54,000 at Chrysler. It also boasts a network of dealers that outnumbers Chrysler by almost two-to-one, with about twice as many brands.
And even though the automaker put 1,100 of its 6,000 dealers on notice that they will have their contracts terminated next year, they are shielded by a labyrinth of state franchise laws.
GM also has publicly traded equity and debt, complimented by international operations in Europe, Asia and Latin America.
Those factors contribute to a large web of complications that could hinder the bankruptcy process and present other, more serious risks, David Cole, chairman of the Center for Automotive Research in Ann Arbor, Mich., told MSNBC.
"If you look at the complexity of the company infrastructure and the number of players involved here - the union, the creditors, the dealers, the suppliers and the government - it's an unholy cast of characters," said Cole. "Any one of them could cause a problem, and bankruptcy laws are not well designed to deal with institutions of this complexity."
Cole also said if a "quick-rinse" GM bankruptcy predicted by the administration fails, it could present more far-reaching and serious implications for the overall U.S. economy.
If the planned bankruptcy process "blows up," he says, it could lead to a "cascading failure," shoving auto suppliers into insolvency and forcing other automakers into bankruptcy, according to MSNBC.
"We are talking about the potential for a rapid collapse - it could trigger a national depression," he said. "The automotive supply structure is in pretty serious trouble now... so if we were to see a cascading failure it could quickly spread to the rest of the economy. That's the scale of this industry."
News and Related Story Links:
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As GM Cruises Toward Government Deadline, U.S. Automakers Must Learn to Deal With a Permanently Smaller Market.
Covenant Review LLC:
Company Web Site.