General Motors Corp on Monday offered its final plan to reorganise outside bankruptcy by slashing bond debt, cutting over 21,000 more US jobs and emerging as a nationalised automaker under majority control by the US government.
GM Chief Executive Fritz Henderson said the automaker would file for bankruptcy protection if an offer to exchange bonds for company equity failed to cut $27 billion in bond debt by about 90 per cent or other changes faltered.
Analysts doubted the debt exchange offer would succeed, setting up GM to restructure in Chapter 11.
GM’s bondholder’s blasted the terms of its debt-exchange as a back-room deal designed to protect the interests of its major union the United Auto Workers, a group that campaigned for President Barack Obama in last year’s election.
Representatives of the bondholders said GM and the Obama administration were gambling on a risky and “legally questionable” strategy for a company that once ranked as an icon of American industrial and economic strength.
The White House said on Monday the US government had no desire to run a domestic automaker despite the potential controlling interest.
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“We strongly back an auto industry that we believe can and should be self reliant,” White House spokesman Robert Gibbs told reporters. “It is not our desire to either own or run one of the auto companies.”
GM’s new strategy, which will also jettison the Pontiac brand and shut down production of Saturn brand cars this year, underscored how quickly and far it has fallen since last summer when executives, including Henderson, were insisting that the automaker could restructure under a program of “self help”.
Separately, Chrysler lenders were expected to receive a new offer from the US Treasury as early as Monday in the wake of cost-cutting deals the US automaker has reached with unions in the United States and Canada.
Chrysler faces an April 30 deadline to reach a deal with creditors and cement an alliance with Italy’s Fiat SpA and continue to receive US government emergency support.
The automaker was working “diligently” to complete the Fiat deal and restructure its business by the deadline and maintain government emergency loans, Chief Executive Bob Nardelli said in a memo to staff obtained by Reuters.
Chrysler cleared another hurdle in its reorganization on Monday when Daimler AG reached a deal to divest the nearly 20-percent stake it had held since selling Chrysler to Cerberus Capital Management LP in 2007.
Canadian Industry Minister Tony Clement said it was now more likely Chrysler would not have to go into liquidation following an agreement with the Canadian union that Fiat has concluded is cost-effective.
GM: 60-DAY BANKRUPTCY POSSIBLE
GM’s new offer to bondholders would leave them with a 10 per cent ownership of the restructured automaker, a sharply lower payout than the nearly 40 per cent given to the UAW.
“The offer is unlikely to be accepted by bondholders, who are in effect being asked to sacrifice most of their claims in order to help GM satisfy commitments to the UAW,” Barclays Capital analyst Brian Johnson said.
Henderson, GM’s CEO, told reporters that it was possible for GM to complete the bankruptcy process within a 60-day period, but called the success of the bond exchange critical for the automaker to stay out of court.
“The bond exchange needs to be successful for us to avoid bankruptcy,” Henderson said. “It’s not impossible, but bankruptcy is now more probable.”
The new GM that would emerge from the restructuring would be 89 per cent-owned by the U.S. government and the UAW, provided workers and officials approve the plans. Current GM stockholders would have 1 per cent.
GM shares closed nearly 21 per cent higher at $2.04. GM bonds also moved higher.
Still, Standard & Poor’s equity analyst Efraim Levy maintained a “sell” rating on GM shares.
“Whether there is a bankruptcy filing or not, we see it as lose-lose for shareholders via dilution from equity issuance or loss of value via a filing,” Levy said.
Responding to criticism that its prior turnaround plans had been too slow-moving, GM also outlined deep cuts by the end of 2010: reducing U.S. plants to 34 from 47, slashing US factory jobs by about 21,000 to a total of 40,000, and cutting its dealer network to 3,605 from 6,246 stores.
The Obama administration’s autos task force, which has been overseeing GM’s planning for the past month, said the steps showed the automaker was making progress toward viability.
“Today’s bond exchange filing represents an important step in GM’s effort to restructure,” the task force, headed by former investment banker Steve Rattner, said in a statement.
GM, which last week took $2 billion of emergency US government loans to bring its total to $15.4 billion so far, was told by the Obama administration in late March it had until June 1 to dig deeper and move faster for continued support.
The automaker said it would phase out the Pontiac brand by the end of next year and could stop production of its Saturn models by the end of 2009. A sale of the Hummer SUV brand is still a “reasonable likelihood,” Henderson said.
The steps would leave GM, formerly the world’s largest automaker, reliant on four core brands – Chevrolet, Cadillac, Buick and GMC – and a network of international alliances as it looks to sell off its European unit Opel.preparing to do to help investors get their money back,” said Chim Pui- chung, a legislator representing the financial services industry. “So far they haven’t offered much on this part.”
The central bank had previously refused to disclose parts of its findings, arguing that it would be “against public interest.” It later agreed to reveal in closed meetings deleted parts of the report to legislators.
Sun Hung Kai & Co, the city’s biggest local brokerage by market value, in February agreed to pay back investors in the notes, making it the first vendor to decide to provide a full refund. It didn’t admit to any liability or wrongdoing in selling the products.
BOC Hong Kong Ltd, Bank of East Asia Ltd, Wing Hang Bank Ltd and Dah Sing Banking Group Ltd were among the 19 firms that sold the notes, according to the Hong Kong Association of Banks.
Clarina Man, a spokeswoman for BOC Hong Kong, declined to comment on the HKMA report. Vera Lung, a spokeswoman for Bank of East Asia, didn’t immediately return calls from Bloomberg seeking comment.