General Motors, under federal deadline to produce a business plan that will show a path to viability, is likely to ask for additional funds on top of the $13.4 billion already committed by the U.S. government. G.M. will also present to the Government a bankruptcy scenario, under which they would ask for debtor in possession financing from the government, as they are unlikely to receive such financing privately. Those two choices will put the Obama Administration in a difficult spot, with either choice having big ramifications financially and politically.
G.M., up to now, has not been able to reach agreement with major stakeholders on cost reductions that were to be part of the “viability” plan. Bondholders and labor have both balked at prospective changes, and this fact is pushing G.M. towards the bankruptcy option. The Wall Street Journal is reporting that G.M. CEO Rick Wagoner, once very much opposed to bankruptcy, has changed his thinking and is moving towards that option as it becomes apparent that labor and debt holders will not be able to be persuaded.
One plan includes a Chapter 11 filing that would assemble all of GM’s viable assets, including some U.S. brands and international operations, into a new company. The undesirable assets would be liquidated or sold under protection of a bankruptcy court. Contracts with bondholders, unions, dealers and suppliers would also be reworked.
Of course this well timed leak to the Journal will show the bondholders and labor that G.M. is willing to take the plunge into bankruptcy, where their (bondholders and labor)prospects will be much bleaker. And this leak will produce some backlash against labor, but the main stumbling block is the agreed upon method of financing of the so called Voluntary Employees Beneficiary Association, which was negotiated as a way of relieving the Big Three of their responsibility to provide health care to employees, which would save them billions annually. The catch was that the Big Three were required to provide start up funding for this VEBA, which requires billions in upfront payments of cash and stock. And as G.M. seeks to modify this agreement it is apparent that the modifications could endanger the financial health of the VEBA, thereby placing the UAW at great risk, as a bankruptcy for the VEBA would leave their health care provisions in shambles. From the Wall Street Journal:
The core problem, however, is that GM and Chrysler want to change how they intend to fund the VEBA, according to this person. The original agreement called for the auto makers to parcel out a combination of large cash payments and company stock over time to the union-run VEBA. But the companies want to hand over all of the stock they owe now and restrict the union’s ability to sell the stock.
That would mean that the union could face a substantial loss if the value of the stock plummets or the companies file for bankruptcy, according to this person.
“The companies are basically running away from their promises,” the person said.
The companies also want to cut the total amount of stock they owed the union according to the current agreement.
Half of the companies’ obligation also includes cash payments and the auto makers also hope save cash by shifting additional risk to the union, according to this person. Instead of making large cash payments as called for in 2010 and 2012, GM and Chrysler want to make small payments stretched out over 20 years.
Finally, the companies originally planned to transfer responsibility for retiree health care to the union trust starting Jan. 1, 2010. Now GM and Chrysler want to shift that responsibility immediately
“The combination of all of these changes would destine the VEBA to failure,” one person said.
It is a big mess, and if the Government steps in to rescue the VEBA then other industries with health care problems would likely clamor for some relief as well.
For G.M. it is clear, as it was in November/December, that the numbers do not work. Even an additional $5 billion now will only, once again, delay the day of reckoning. Bankruptcy is in the immediate future of G.M., unless the Government steps in with billions more. To do so without major stakeholders having granted major concessions would be, in my opinion, irresponsible. And the Obama Administration has not yet appointed an auto czar to assist in these negotiations, which has been a handicap to success. Tuesday should be an interesting day for the American auto industry!
Bill Manzi.com 