General Motor’s latest restructuring effort looks like its first real stab at Chapter 11-style reorganisation – minus the name. New chief Fritz Henderson’s plan lays out more cost cuts and brand reductions, offers bondholders a chance to swap their securities for equity and even proposes the US government exchange half its loans for stock. But that still might not be enough to avoid bankruptcy.
For starters, the revamp would leave the biggest single group of creditors taking the most pain, perhaps increasing their willingness to take their chances in a proper Chapter 11 filing. It’s not necessarily that holders of $27.5bn of unsecured bonds would get just equity and no cash – that looked increasingly likely in recent weeks.
It’s that they would receive just 10% of the restructured company. Meanwhile, in return for each giving up just $10bn each, the trust set up to cover United Auto Workers’ healthcare costs would own 39% and the US government could wind up owning at least half of a reconstituted GM. That may be enough of a disparity to persuade sufficient numbers of bondholders to reject the plan – and GM executives reckon anything less than a 90% acceptance rate spells bankruptcy.
But even if bondholders do accept, GM’s balance sheet would still be laden with liabilities: around $6bn of secured debt, loans of at least $10bn from the government – with more aid likely in the next year or so. And the Motown manufacturer may soon owe perhaps another $6bn to foreign governments. What’s more, GM would still be in hock the UAW healthcare trust to the tune of $10bn and has done little if anything to resolve the $14bn or so of unfunded non-UAW healthcare liabilities.
Sure, the most recent bout of proposed cost cuts is encouraging – the company aims to slash $7bn from annual fixed costs by shuttering its Pontiac marque, laying off more staff and closing more plants and more dealers than envisioned in its February plan. And it would do all of this more quickly than promised in the past.
But the plan would still leave GM with some $46bn of liabilities, very little cash and virtually controlled by the federal government. Even GM estimates it will fail to achieve a net present value if industry-wide car sales do not top 15.3m in the next few years – up from around 9m today.
That leaves it precariously positioned for the foreseeable future and leaves the value of any new equity in question. For some creditors, bankruptcy might still seem like the less worse option.