At 8:00 P.M. this morning, General Motors filed for Chapter 11 bankruptcy in the U.S. Bankruptcy Court for the Southern District of New York. Judge Robert Gerber was assigned to the case.
GM CEO Fritz Hendesrson told reporters, “We intend to offer you nothing less than best-in-class cars and trucks. We look forward to the chance to win your business, and win back your trust.”
GM will soon organize into a new company that will purchase nearly all of the assets from Old GM that New GM will need to implement a business plan. According to an Obama Administration official, New GM will “have far less debt and a world class balance sheet.”
The Treasury Department will provide $30.1 billion in financing to support GM during this transition phase (the money will come from the Troubled Asset Reliefe Program, or TARP, who has already loaned out $20 billion to GM), but the Treasury Department “does not anticipate providing any additional assistance to GM beyond this commitment.” In return, the federal government will receive $8.8 billion in debt and 60% of equity in New GM. The government will also get the right to appoint all but 2 initial directors of New GM.
The Obama administration said that the taxpayers would get money back, but how much and when is uncertain: “We certainly intend to maximize taxpayer proceeds.”
But the U.S. isn’t the only government helping GM. Together, the governments of Canada and Ontario will lend $9.5 billion to GM and New GM, and they will receive $1.7 billion in debt and preferred stock as well as 12% of equity in New GM. The Canadian government will also have the right to appoint one initial director.
President Obama made the following statements concerning the filing for bankruptcy: “Our goal is to help GM get back on its feet … and get out quickly. … What we have then is a credible plan that is full of promise. … [The restructuring plan is a] viable, achievable plan that will give this iconic American company a chance to rise again. … Instead of taking so much stock in GM, we could have simply offered the company more loans. But for years, GM has been buried under an unsustainable mountain of debt. And piling an irresponsibly large debt on top of the new GM would mean simply repeating the mistakes of the past.”
The following is a summary of the restructuring plan, courtesy of FOX News:
– — Cut GM’s production break-even point from 16 million annual unit sales to 10 million.
– UAW concessions include allowing GM to shed its $20 billion obligation to its pensions and health care fund, otherwise known as the VEBA. The White House said the UAW concessions were more substantial than those sought by the Bush administration when it was considering throwing the company a taxpayer lifeline.
You really think the UAW would have given in to concessions proposed by the Bush Administration? The only reason they gave in now is because they’ve finally realized that it’s give in or lose everything.
– Bondholders representing at least 54 percent of the company’s unsecured bonds have agreed to trade their portion of GM’s $27.1 billion in unsecured debt for a pro-rated share of 10 percent of the equity in the so-called new GM. In addition, the bondholders will receive warrants for an additional 15 percent of the company. The bankruptcy process, which the White House said should take between 60 and 90 days, will enforce this distribution as well as adjudicate proceeds for bondholders who do not participate in the White House deal.
– The reorganized GM will buy most of the old GM assets needed to carry out its business plan. The purchase will happen in the Chapter 11 process. In exchange, the U.S. government will relinquish a majority of its loans to GM.
– The new GM will create an independent trust (VEBA) that will finance health care benefits for GM’s retirees. The VEBA will be funded by a note of $2.5 billion payable in three installments that end in 2017. There will be an additional $6.5 billion purchase that will create 9 percent perpetual preferred stock. The VEBA will also receive 17.5 percent of the equity of New GM and warrants to purchase an additional 2.5 percent of the company. The VEBA will be able to chose one independent director for the new board. It will have no right to vote its shares or other exercise other governance rights.
– The GM-qualified pensions for current hourly and salaried employees will be transferred to the new GM.
– Treasury will provide $30.1 billion of debtor-in-possession financing to support GM through an accelerated Chapter 11 process. Officials anticipate no additional funding for GM. “There is no plan of any kind for future support beyond this point,” an official said.
I’ll believe that when this is all over.
The government will receive $8.8 billion in debt and preferred stock and 60 percent of the company’s equity. Treasury will appoint all new board of directors members not appointed by the VEBA and the Canadian government.
– Governments in Canada and Ontario will lend $9.5 billion to GM and the new GM. The Canadian and Ontario governments will receive approximately $1.7 billion in debt and preferred stock, and approximately 12 percent of the equity of the new GM. The Canadian government will select one director to the new GM board.
– The new GM will, as part of the government-supervised restructuring, build a new small car in an idled UAW factory. The goal is to increase the share of U.S. production for U.S. sale from 66 percent currently to 70 percent.
These are the White House “principles” for managing the ownership stake:
– The government will sell equity stakes as “soon as practicable.” The goal is a profitable company without government involvement.
– The government will reserve the right to set up-front conditions to protect taxpayers, promote financial stability and encourage growth.
– The government will manage its ownership stake in a hands-off, commercial manner. It will not interfere with day-to-day company operations. No government employees will serve on the boards or be employed by these companies.
– The government will only vote on core governance issues, including the selection of a company’s board of directors and major corporate events or transactions.
Again – I’ll believe this when it’s all over.
Under the White House policy on new GM warranties, GM will honor consumer warranties. Last week, the Treasury Department provided $361 million in financing to the Warranty Support Program as a backstop so GM can pay warranties on vehicles sold during the restructuring.
Also, employees will continue to receive ordinary salary, wages and benefits. The pension plan and VEBA will be transferred to the new GM. GM will seek authority at its “first day” bankruptcy hearing to continue to pay suppliers. In addition, the U.S. Treasury’s Supplier Support Program will continue to operate, and GM suppliers benefiting from the program will continue to receive that support.
So, there you go – General Motors has finally filed for bankruptcy. While it’s not as independent of government intervention and money as I’d like it to be, it’s a step in the right direction away from endless bailouts and loans.
GM stock actually did pretty well today, up 0.1o points, from 0.75 to 0.85. Meanwhile, the General Motors supplier Delphi (which I own stock in), who announced an agreement to emerge from bankruptcy, was down 0.02 points.
Overall, I think this is a good move. I think that GM is going to come out of this stronger. I think they’ll come out and survive just fine. I still plan on buying some Ford stock, since I think they’ll emerge the strongest from this crisis, but we’ll see.
Like I’ve said many times before: bankruptcy courts exist for a reason, and just because a company is big and important, doesn’t mean they’re too special to use bankruptcy court; however, we must understand that companies with high-price products with warranties (such as cars) are different than other companies. Consumers do wonder, “If GM fails, what happens to my warranty?” But there are ways to work around this other than endless government bailouts.
What we must also remember is: Even if GM or Chrysler fails, there is NO auto company who is producing enough cars to make up for the sudden lack of automobile production caused by the failure of GM or Chrysler. Let’s pretend that Chrysler fails. What would happen? Some Chrysler workers would lose their jobs – that’s inevitable. But Ford would then pick up a division of Chrysler like Dodge, and Fiat may pick up JEEP, etc. Jobs WOULD be lost, but the majority of the people would keep their jobs, because there’s no way that enough cars could be produced if one of the Big 3 failed.
I’ll continue to post more about the auto crisis through the coming months.