The Obama Administration’s plans for G.M. and Chrysler seem to be taking shape publicly for the first time, with selected leaks out of the Administration laying out a map of where this debacle might end up. Today’s Wall Street Journal lays out the blueprint, indicating that the Administration is planning on a bankruptcy filing by G.M. that would wipe out the recalcitrant stakeholders and start anew by breaking the company in two. The “good” or new G.M. would take the attractive assets, and the “bad” or “old” G.M. would be left with all else, including some retiree legacy costs. From the Wall Street Journal:
GM looks increasingly like it will be forced into filing for bankruptcy protection, sometime in mid-to-late May, and that the surviving “new GM” will retain select brands and some international operations, said several people familiar with the situation.
Stakes in this new GM could be given to creditors. It is also possible the new company could be sold whole or parts to investors or its shares sold in an initial public offering. The UAW’s retiree health-care fund would likely get either some shares or proceeds from the sale of the stock.
A key ingredient in acting on this plan is getting the UAW to agree to an entirely new contract, including major reductions in health-care benefits, said several people involved in the matter. “That’s the No.1 wild card here,” one of these people said Monday.
Under the plan, the “good” GM would not be expected to hold the tens of billions of dollars in retiree and health care obligations that hurt the auto maker in recent decades. Instead, those obligations would be transferred to an “old GM,” made up of less-desirable brands such as Hummer and Saturn, and underperforming plants and other assets.
At Chrysler the drill would be the same, with bondholders and labor both wiped out by the prospective filing. It is a doubtful prospect that Chrysler could ever emerge from such a filing.
While I am certainly no lawyer or expert in bankruptcy law it strikes me that the bondholders would fight a G.M. split to the death, and might be able to delay such a deal from moving forward quickly. But I believe that the Obama team is tired of the nonsense from both debt holders and labor, and intends to get what they need from both through negotiations, with the credible threat of bankruptcy to give both groups “incentive” to accept the inevitable. If they cannot they are now making clear that both groups will be run over by bankruptcy. But what is still not clear to me is how legacy costs will be apportioned through bankruptcy, and what will happen if the VEBA collapses. Much more to come.