On the Fritz

In 1970, General Motors had 395,000 employees and 150 factories in the United States , Hello, Mr. Big! Fritz (GM’s new CEO, Fritz Henderson) has a different vision for his new charge: 38,000 U.S. employees with a plan to “eliminate another 21,000 factory jobs, close 13 plants [to 34], cut its vast network of 6,500 dealers almost in half and shutter its Pontiac division.” April 27^th NY Times. Hi, Little guy!

Much smaller Chrysler is trimming too, only unlike GM, which is still struggling with its unions, number three seems to have worked out at least a labor deal: “Chrysler would give the union a 55 percent stake to cut its obligations to the health care trust in half, said these people, who spoke on condition of anonymity because details of the agreement have not been released publicly… The deal suspends cost-of-living pay increases, limits overtime pay and reduces paid time off. It also eliminates dental and vision benefits for retirees. It also provides for Fiat to begin building cars in at least one Chrysler plant.” NY Times.

Even with federal support, both companies have battled with their bondholders (and other holders of debt instruments), many of whom resisted offers to reduce their debt enough to placate the government or convert their holdings into equity in the going-forward companies – if they indeed go forward. Chrysler’s ticking time bomb had the shorter fuse – April 30; GM still has until the end of May. Then the federal checks stop unless there is a government-approved restructuring in place, in or out of bankruptcy.

Who are the like owners if the restructured carmakers? For Chrysler, if the cards fall correctly, Fiat walks away with a 35% stake (their management will replace the current CEO), and the U.S. government and the carmakers’ unions have an Italian partner. A last minute deal with its banks, hedge funds and bondholders (they agreed to shave $6.9 billion owed down to $2.25 billion) seems to have saved the deal… assuming the unions ratify their agreement and creditors fall in line. The Department of the Treasury has told the 46 creditors that they have until Thursday to approve – unanimously – this deal. The big players, holding 70% of the debt, have signed off, but the smaller funds are willing to walk the tightrope. These minority creditors could derail this process; it’s down to the wire.

However, the order of magnitude of Chrysler’s finances pale in comparison to the numbers on GM’s table. The government still seems to be pushing a boulder uphill with not a lot of receptivity; according to an April 27^th report by the Associated Press: “General Motors CEO Fritz Henderson said the company would offer the Treasury Department more than 50 percent of its stock to absolve GM of $10 billion in government loans (they borrowed $15.4 billion in total)… The automaker also proposed that the United Auto Workers take GM stock for at least half the $20 billion the company owes to a union-run trust that will assume retiree health care expenses starting next year… Combined, the union and government would own 89 percent of the century-old automaker, which has been bleeding red ink and is saddled with more than $62 billion in debt.”

What happens to GM’s unsecured creditors/bondholders who are owed $27 billion? A government-backed proposal would give them 10% of the new equity in lieu of their lovely bonds; the old shareholders would be crammed down to an almost non-existent 1%. While the offer looks like 46 cents on the dollar, reality is not nearly so rosy – since the United Auto Workers and the government will get a monstrous share, those bondholders get slammed even more.

It seems likely that a formal bankruptcy is likely for both companies; the issue is whether or not there is an agreement from creditors in place to make that bankruptcy a reasonable and planned implementing structure. Further, creditors may feel more comfortable in an open GM bankruptcy where a judge and a trustee make decisions that carry no direct political ramifications or purported “pro-union” positions – like the unions really want this deal.

Still, GM has a month to solve these issues. But with Americans wary of buying vehicles manufactured by failing companies with unhappy workers, even if warranties were not at risk, the exceptionally difficult credit markets make car-buying, at any level, a post-bankruptcy challenge that by no means guarantees that surviving carmakers will… well… er… survive.

I’m Peter Dekom, and I’m hoping the credit markets thaw and the meltdown freezes.