Chrysler and General Motors will fail to meet government-mandated restructuring targets by the end of the month. But the US reportedly intends to give Chrysler and General Motors another month to wring concessions out of their lenders and unions – and to lend them more money. That’s the wrong move. The Obama administration should force them into bankruptcy.
Sure, on Friday, just days before the deadline, GM reportedly made new offers to both its workers and bondholders in the hopes of slashing its liabilities. But it’s not clear either party would accept.
The terms GM offered to settle its healthcare bill with the UAW union - granting $10bn in preferred stock and funding the other $10bn with cash over 20 years - might not leave the independent healthcare trust with enough of a base to cover its outgoings.
Bondholders, meanwhile, would under one plan receive eight cents on the dollar in cash, 16 cents in new unsecured debt and own 90% of GM’s equity. That sounds like the sort of solution that emerges from a bankruptcy – but it would only be accepted if bondholders thought the company would then survive.
If they thought a Chapter 11 filing was still likely, there’d be no upside to swapping senior securities for stock that would be immediately wiped out.
And bankruptcy does still appear to be on the cards. Even if GM strikes an agreement with its bondholders, it still needs emergency aid from the government on top of the $13bn it has already taken. Its latest plan calls for up to $22.5bn more, as well as $7.5bn if car sales don’t recover in the next two years, $7.7bn in energy loans and $6bn from foreign governments.
In other words, government loans would more than dwarf any debt reduction from bondholders. Credit Suisse, for example, reckons GM could end the year with $50bn in debt, almost 60% more than in 2008.
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Annual interest payments would be $3bn, assuming a blended rate of 6% – $3.9bn if the independent trust were to take preferred shares. GM would have to generate a whopping 6% pre-tax profit margin on consensus revenue estimates of $107bn just to cover that.
But GM is still losing money. It could burn through $30bn in the next three years, according to Credit Suisse. Of course, car sales could suddenly skyrocket and save the day. But that’s a big gamble to take with taxpayers’ money.
Forcing GM – and Chrysler - into bankruptcy now would mean acknowledging losses, too. But at least Motown’s manufacturers might be in a better position when the market finally improves.