General Motors will file for bankruptcy tomorrow morning. A smaller GM will come out of the reorganization with union workers protected nicely. Unsecured bond holders do not appear to be in the same shape.
The U.S. Treasury is prepared to provide approximately $30.1 billion of financing to support GM through an expedited chapter 11 proceeding and through the transition to a new GM, a senior Treasury official told reporters tonight on a conference call that I participated in.
The Treasury does not anticipate providing any additional assistance to GM beyond this commitment. The Governments of Canada and Ontario will participate alongside the U.S. Treasury by lending $9.5 billion to GM and New GM.
In exchange for funds already committed by the U.S. Treasury and the new injection of $30.1 billion, the U.S. government will receive approximately $8.8 billion in debt and preferred stock in the new GM and approximately 60% of the equity of the new GM. The U.S. Treasury will also have the right to appoint the initial directors other than those that will be selected by a newly established VEBA and the Canadian government.
The new GM will establish an independent trust (VEBA) that will provide health care benefits for GM’s retirees. The VEBA will be funded by a note of $2.5 billion payable in three installments ending in 2017 and $6.5 billion in 9% perpetual preferred stock. The VEBA will also receive 17.5% of the equity of New GM and warrants to purchase an additional 2.5% of the company. The VEBA will have the right to select one independent director and will have no right to vote its shares or other governance rights.
As of tonight bondholders representing only approximately 54% of GM’s unsecured bonds have agreed to exchange their portion of the Company’s $27.1 billion unsecured debt for their pro-rata share of 10% of the equity of new GM, plus warrants for an additional 15% of the new Company.
Curiously, all secured GM bondholders will be paid in full this time, unlike in the Chrysler reorganization plan. There is one difference, however, this time compared to the Chrysler reorganization, a person familiar with the situation stated. In the Chrysler situation the secured debt was held by hedge funds and other undesirables, this time the secured debt is held by banks. Do I hear Jamie Dimon clapping in the background? It sure wll be nice to see a copy of the secured bondholder list, which should eventually surface out of the bankruptcy court.
The goal of the new GM will be to lower its breakeven point to a 10 million annual car sales environment, people famliar with the situation said. Before restructuring, GM’s breakeven point was in excess of 16 million annual car sales.
Even during the bankruptcy process, employees will get paid in the ordinary course, including salary, wages and ordinary benefits. Assuming the process moves forward as expected, Pension Plan and VEBA funding will be transferred to New GM.
The Treasury and White House continue to promote this as a situation where as a common shareholder, the government is a "reluctant shareholder" that will only vote on core governance issues, including the selection of a company’s board of directors and major corporate events or transactions.
Yet, when asked, a senior White House official said that despite both GM and Chrysler now headed through the bankruptcy process and out of it within two to three months, "On a go forward basis, the staff of the [auto] task force will remain active."
"There's plenty[for the task force] to do," he said, before heading off to meet with the President.