General Motors’ bondholders and unions look set for an acrimonious couple of months. But their high-profile face-off over which should make more concessions as the car maker struggles to avoid bankruptcy could actually become a sideshow. Both may face more pain than they seem to expect, because there’s a bulkier figure climbing into the ring: the US government.
It seemed to be a different story in December, when.the hope was that government bridge loans would keep GM afloat for three months while executives slashed costs to set the Motown manufacturer on the path to profitability. The restructuring was to include persuading bondholders to reduce almost $30bn of unsecured debt by at least two thirds and the UAW union to accept equity in place of cash for half the outstanding $20bn owed to an independent trust managing worker healthcare costs.
GM has achieved neither, so President Obama has granted another 60 days' grace - and extra government help. So expect continuing frequent assertions from the union that its members have sacrificed much already, and vociferous rebuttals from bondholders. But these arguments could fast become nearly irrelevant.
Here’s how. The US government has already poured in $13.4bn just to keep GM’s engines running and will probably add another $16bn in the next year or so. GM has also asked for $7.7bn to help finance development of greener cars and is hitting foreign governments up for $6bn. Tot it all up, and that’s $44bn. Even if the union and bondholders each agreed to accept just 20 cents on the dollar for their combined $50bn of calls on GM - far less than has been contemplated to date - that wouldn’t be enough to offset the new liabilities to governments GM is piling on.
What’s more, the government loans - along with $11bn-odd of existing secured debt - are likely to rank ahead of bondholder and union claims, meaning both groups would risk being left with the crumbs under the bankruptcy court table once senior claims are met. And even a successful restructuring of GM doesn't guarantee sufficient profits for the company to be worth enough to support anything like $55bn of liabilities - at least not for years. So in a strict legal sense, there might not even be any crumbs for the union or the unsecured creditors.
That may leave the two groups with unappealing options: strike what may appear to be a humiliating deal now and at least have something to show for it, or pray that they can fight cleverly enough to win a game of bankruptcy chicken with the Obama administration.