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General Motors Restructuring Will Require a Chapter 11 Bankruptcy Filing and a 363 Sale

Obama Administration officials claim that a New GM will now have far less debt and a "world class" balance sheet.

by on May.31, 2009

GM Renaissance Center in Detroit

"Meaningful sacrifice" now includes U.S. taxpayers.

Senior officials in President Obama’s administration confirmed tonight that General Motors will file for bankruptcy tomorrow and proceed with a sale of its productive assets to a New GM, which should emerge from court protection in “60 to 90 days.”

The latest plan reduces GM’s liabilities by well over 50%, but gives taxpayers a 60% share of a once proud and dominant automaker that controlled half of the U.S. market and was the largest automaker in the world. Those times now seem long ago and far way. GM lost $6 billion in the first quarter of 2009 and consumed $10 billion in cash. All told, GM has lost more than $87 billion in the last five years.

The strategy for a New GM is consistent with President Obama’s direction that he laid out in a speech on March 30, 2009, which required GM to rework its business plan, accelerate its operational restructuring and make far greater reductions in its outstanding liabilities.

In the interim, administration officials said General Motors has developed such a plan and has already begun to make progress toward its achievement.

GM has also secured commitments of “meaningful sacrifice” from all of its major stakeholder groups, concessions that are sufficient for The Auto Task Force at the U.S. Treasury Department to allow GM to move forward. As a result, the President has deemed GM’s latest plan “viable.” So Treasury will be making available about $30 billion of additional federal assistance to support GM’s restructuring plan on top of the $20 billion of taxpayer support already supplied.

The Sequel to Chrysler

GM’s restructuringplan is a larger, more complicated version of the Chrysler reorganization that is now winding down in a Federal bankruptcy court in New York City, where a positive ruling on its sale to Fiat is expected tomorrow. Like Chrysler, GM will use Section 363 of the U.S. Bankruptcy Code to eliminate impediments to its successful re-launch.

The “New GM” will purchase substantially all of the assets of the old insolvent GM needed to implement its business plan when it emerges out of a Chapter 11 filing. A crucial part of the plan is the the U.S. Government relinquishing the majority of its loans to GM.

Treasury is also prepared to provide approximately $30.1 billion of financing to support GM through an expedited Chapter 11 proceeding and transition New GM through its restructuring plan. In exchange for the $20 billion already committed by the U.S. Treasury and the new injection of $30.1 billion, the U.S. government will receive approximately $8.8 billion in debt and preferred stock in New GM as previously stated, and approximately 60% of the equity of the New GM. The U.S. Treasury will also have the right to appoint the initial directors in New GM other than the one that will be selected by the VEBA and the one from the Canadian government.

Canada Supports

The Governments of Canada and Ontario will lend $9.5 billion to GM and New GM. They will receive about $1.7 billion in debt and preferred stock, and approximately 12% of the equity of the New GM. Based on its “substantial financial contribution,” the Canadian government will also have the right to select one initial director to the board.

This means a majority of New GM board members will be , well, new.  Since managements serve at the discretion of the board, more senior executive changes — beyond the resignation of now former Chairman Rick Wagoner– will likely be coming. 

Treasury as Reluctant Shareholder

Administration officials were adamant that the government is now a “reluctant shareholder” and will sell its stake as soon as practical; and that GM can succeed at the current annual sales rate of under 10 million units in the U.S. No further government support is contemplated, they insisted.

As a result of this restructuring, GM lowers its break even point to a 10 million annual vehicle sales rate (SAAR). Before the restructuring, GM’s break even point was in excess of 16 million annual car sales.

Obama administration officials also emphasized that the UAW made important concessions on compensation and retiree health care that will help save jobs for active employees, as well as preserve the pensions and health care  benefits for retirees. The GM qualified pension plans for both hourly and salaried employees will be transferred to the New GM as part of the purchase process.

“In virtually every respect, the concessions that the UAW agreed to are more aggressive than what the Bush Administration originally demanded in its loan agreement with GM,” said a senior official.

UAW Concessions

The UAW’s existing VEBA agreement where GM previously owed $20 billion, now will be funded  with a $2.5 billion note,  payable in three installments ending in 2017 and $6.5 billion  worth of  9% perpetual preferred stock. The VEBA will also receive 17.5% of the equity of New GM and warrants to purchase an additional 2.5% of the company. Whether the UAW can continue to maintain health care at current levels is questionable.

The VEBA will have the right to select one independent director and will have no right to vote its shares or other governance rights.

Bondholders Have No Choice

Bondholders representing at least 54% of GM’s unsecured bonds have agreed to exchange their portion of GM’s $27 billion in unsecured debt for their pro-rata share of 10% of the equity of new GM, plus warrants for an additional 15% of the New GM. The bankruptcy process will be used to impose this deal for those bondholders and other unsecured creditors that failed to accept or did not participate in the offer.

GM will announce that it will close 11 plants and idle another 3 plants. As we have previously reported, New GM will also build a new small car in an idled UAW factory. This will increase the share of GM’s U.S. production for U.S. sale from its current level of about 66% to more than 70%. The UAW successfully waged a public campaign by lobbying Congress  to change GM’s plans to bring in small cars from Asia. Importing cars from Korea, China or Japan – all closed markets  to U.S. autos – with taxpayer dollars is politically controversial, to understate the issue that the  Obama Administration has now defused for the moment.

Customers, Employees, Suppliers

GM will continue to honor consumer warranties. Last week, Treasury made available $361 million in funds under the Warranty Support Program to GM to provide “a backstop on the orderly payment of warranties for cars sold during the restructuring.”

Administration officials said that from an operating perspective, the day after tomorrows’ filing will not be materially different from today. Employees will get paid salary, wages and ordinary benefits. Assuming the sale moves forward as predicted, Pension Plan and VEBA funding will be transferred to New GM. As with Chrysler, GM will seek authority at its “first day” bankruptcy hearing to continue to pay suppliers. In addition, Treasury’s Supplier Support Program will continue to operate.

GM will also seek authority at its “first day” hearing to continue to honor its dealer incentives for those dealers who are expected to continue to be part of GM’s distribution network going forward. Fired dealers will be offered an agreement to orderly wind down their operations during the next 18 months.

GM President and CEO Fritz Henderson to Hold Media Briefing Mid-day Monday

It is likely that he will announce that GM will seek protection under Chapter 11 of the U.S. Bankruptcy code.

by on May.29, 2009

A new chapter in GM's history starts Monday.

A new "chapter" in GM's history starts Monday.

General Motors President and CEO Fritz Henderson will host a press conference on Monday, June 1. The conference will be around mid-day at the GM Building, 767 Fifth Avenue, in New York.

It is likely that Henderson will announce that GM will seek protection under Chapter 11 of the U.S. Bankruptcy code.

As we reported previously, GM’s exchange offers of debt-for-equity for $27.2 billion of its unsecured public notes expired on May 26, 2009, and therefore  it will not meet the requirements  imposed by the Treasury Department for a viable company under its restructuring plan. GM’s Board of Directors is now discussing next steps. Only 15% of Bondholders agreed to that deal, which would have given them 10% of the company.

The U.S. Treasury then extended and modified the offering to objecting bondholders, saying accept the 10% stake now in a reorganized GM as originally proposed, and eventually another 15% of the new company will be offered by way of stock warrants.

The GM reorganization that Treasury is dictating as the largest debtholder involves the sale of substantially all of GM’s productive assets under Section 363(b) of the U.S. Bankruptcy Code.  This would allow a “New GM” to emerge with a healthy balance sheet, while the Old General Motors Corporation is dissolved and its creditors paid off from what little remains.

The U.S. Treasury’s proposal expires at 5:00 pm EDT, Saturday, May 30, 2009. The new Treasury deal also requires “statements of support satisfactory to the U.S. Treasury” indicating that bondholders will not oppose the so-called 363 bankruptcy sale. If bondholders do not go along,  Treasury says it will not support even a 10% payoff.

Subscribe to TheDetroitBureau.comThe Treasury-revised deal is clearly designed to head off bondholder objections to a GM reorganization, which will help streamline a bankruptcy filing that is now coming  next week. It is vital to GM’s chances for survival that it emerge as quickly as possible from receivership. Sales have plummeted by almost half this year as it became clear that GM was insolvent and the few car buyers that remain in the depressed global markets went elsewhere.

For the third day now Chrysler bondholders are arguing in U.S. Bankruptcy Court in New York against a similar reorganization proposal and 363 sale of  its productive assets to Fiat, while Old Chrysler LLC is dissolved and bondholders and other debtors divide the little that’s left.

More than 300 objections to the Chrysler sale have been filed by creditors and bondholders who would rather see a complete dissolution and sale of the company, based on their highly dubious proposition that in a depressed auto market they would get more money from selling everything and grow fatter  — like vultures picking at a corpse.

There are no buyers out there for automotive assets right now, and bondholders prove that very proposition by refusing to buy into the reorganized company themselves by accepting equity for debt.  Chrysler, too, is saddled with plummeting sales, making its own quick emergence from bankruptcy vital to its survival. Whether common sense prevails at Chrysler — or GM – remains to be seen.

Under the GM reorganization now proposed, U.S. taxpayers would own 72.5% of New GM.

Treasury Changes Offer to Balking GM Bondholders

Government says take the new deal or get nothing at all.

by on May.28, 2009

Is this an offer bondholders can't refuse from the U.S. Government.

Is this finally an offer GM bondholders can't refuse?

With part carrot and a larger stick the United States Treasury Department has put a new deal on the table for the GM bondholders who refused to go along with a debt-for-equity swap that expired yesterday.

Treasury now says accept the 10% stake in a reorganized GM and eventually another 15% of the new company will be offered by way of stock warrants. This is either a modest or generous peace offering, depending on your viewpoint.

The Treasury revised deal is clearly designed to head off bondholder objections to a GM reorganization, which will help streamline a bankruptcy filing that is now likely next Monday. For the second day now Chrysler bondholders are arguing in U.S. Bankruptcy Court in New York against a similar reorganization proposal and sale of good assets to Fiat, while Old Chrysler LLC is dissolved and bondholders and other debtors divide what’s left. More than 300 objections to the sale have been filed.

The GM reorganization involves the sale of substantially all of its assets under section 363(b) of the U.S. Bankruptcy Code, which allows a New GM to emerge with a healthy balance sheet, while the Old General Motors Corporation is dissolved and its creditors paid off from what little remains.

Under the GM  reorganization now proposed U.S. taxpayers would own 72.5% of New GM.

The revise bondholder deal comes in two parts: Old GM (Warrant 1) receives warrants to acquire newly issued shares of New GM equal to 7.5% of New GM common equity outstanding at closing. These warrants are exercisable at any time prior to the seventh anniversary of issuance, with an exercise price set at the share price that would equate to an aggregate equity value of $15 billion based on the shares outstanding at closing, fully diluted for the issuance of such warrants.

Then there’s Old GM Warrant 2 for another 7.5% of New GM common equity outstanding at closing, exercisable at any time prior to the tenth anniversary of issuance. The exercise price is set at the share price that would equate to an aggregate equity value of $30 billion based on the shares outstanding at closing, fully diluted for the issuance of such warrants. 

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