Government bailout worse than bankruptcy? bondholders 30 cents on the dollar

Discussion in 'Trading' started by bond tr4der, Dec 7, 2008.


    GM skirts bankruptcy, but not its pain
    Sun Dec 7, 2008 2:49pm EST

    By Kevin Krolicki - Analysis

    DETROIT (Reuters) - Weeks before it runs short of cash, General Motors Corp may have won a reprieve from bankruptcy by U.S. lawmakers who reluctantly concluded it was too big to fail and the economy was too weak to take its collapse.

    Now the bad news: GM is still headed for wrenching restructuring under federal oversight that will hit its investors, creditors, dealers and workers almost as hard as if the top U.S. automaker had filed for bankruptcy protection.

    At least nine GM plants will be mothballed, another 30,000 workers will be dismissed, retirees will face rising health- care bills, bond holders will be paid off for as little as 30 cents on the dollar and stock holders could be wiped out.

    And that's the soft-landing scenario.

    If a now-shelved merger with Chrysler LLC is revived under government backing -- as some Republican lawmakers urged last week -- analysts expect up to 40,000 more job cuts and seven more plants to be shuttered from Michigan to Mexico.

    The aim is to forge a leaner automaker that can emerge from a crisis that exposed the fatal weakness of GM's debt load and the drain from too many dealers, brands and workers.

    "We are not dealing with an industry on the verge of failure. We are dealing with an industry that has failed," said Jack Williams, resident scholar at the American Bankruptcy Institute.

    GM lobbied hard for aid to avoid a Chapter 11 bankruptcy filing for protection from creditors, arguing such a step would send it spiraling into liquidation as consumers shunned its cars and trucks and questioned the backing of its warranties.

    The still-emerging U.S. government response is expected to be overseen by a "car czar" empowered to set targets and enforce standards for the restructuring of GM, Chrysler and Ford, if the latter draws down a credit line it has sought.

    Experts see that as an attempt to craft a stigma-free alternative to bankruptcy intended to achieve many of the same aims by extracting concessions from every group with a stake in GM's ultimate success.

    "In theory, there's not anything you can do in bankruptcy that you couldn't do out of bankruptcy," said financier Wilbur Ross, known for his reorganizations in the U.S. steel and auto- parts industries.

    Columbia University economist Jeffrey Sachs agreed in congressional testimony last week, telling lawmakers that the automakers should be allowed to reorganize outside bankruptcy.

    "We don't need Chapter 11 filing to do a balance sheet restructuring. We can do it in the shadow of this," he said.


    Senate Banking Committee Chairman Christopher Dodd of Connecticut said on CBS's "Face the Nation" Sunday that GM should replace its chief executive if it receives emergency government loans.

    Dodd agreed with suggestions by fellow lawmakers that GM should probably consider replacing CEO Rick Wagoner and restructure with a new team.

    "I think he has to move on," Dodd said.

    Dodd said management changes have to be part of conditions for a bailout to help the companies restructure, but that does not mean an across-the-board housecleaning.

    "Ford is fairly healthy, so we don't want to brand all of these companies exactly the same way," Dodd said.

    Auto industry management has been criticized in Congress for failing to innovate and take other steps to better position their companies to compete against leaner foreign competitors and weather financial downturns.


    Lawmakers have indicated that any of the $18 billion in federal funds GM is seeking will have to be senior to other claims to protect taxpayer money.

    Depending on the terms set for the aid, the $2.5 billion of GM's market value could be wiped out for shareholders as the automaker works to slash $30 billion of its current debt.

    GM owes $20 billion to a union-run trust fund so it can offload retiree health-care costs from 2010. The automaker has another $36 billion in unsecured debt with another $6 billion owed to secured creditors.

    The United Auto Workers union has agreed to let GM reset the terms on its scheduled contribution to its voluntary employee benefit association and faces pressure to take up to half of its $20 billion in stock in a restructured automaker.

    Other creditors could be taken out at between 30 cents to 40 cents on the dollar, analysts and lawmakers have said.

    GM has also said needs the UAW to allow it to retire thousands of older workers so it can bring in a generation of workers at wages as low as $14 per hour -- or half current wages.

    The result would be the unraveling of an expensive agreement between the UAW and the automakers both credited with creating the middle-class in the United States since World War Two and blamed for hastening the demise of the Detroit Three.

    All of those changes will have to be won by GM without the threat of bankruptcy, a set-up experts see as bound to fail.

    "The problem is that nobody in Washington seems to have any idea of how to solve distressed situations," said Peter Kaufman, an investment banker and restructuring specialist with Gordian Group LLC in New York.

    Congress, Kaufman said, should have set a deadline for private investors to work out a restructuring for GM with the promise of federal money to support any deal that emerged and the threat of failure if it did not.

    "Nobody does anything until they are at the abyss," Kaufman said. "Next spring, the Big Three will be back to us like Oliver Twist pleading, 'may I have more?'"

    Others agree that the attempt to restructure GM and Chrysler outside bankruptcy carries new risk.

    "Bankruptcy can be unforgiving. It is a world of regret," said Williams, who quickly added that the alternative could be worse for GM and taxpayers.

    "I think its headed for failure because it lacks the certainty, clarity and stability that bankruptcy provides."

    (Editing by Maureen Bavdek)

    © Thomson Reuters 2008 All rights reserved
  2. thanks, good synopsis
  3. Ouch! Sure looks like OP is correct - the bailout is worse than bankruptcy! Wonder - does this constitute a "credit event" - is this like FRE or FNM? Will CDS be affected?