On June 1, GM goes to bankruptcy

It is almost definite.  The automaker, after months of struggles, will now be heading to bankruptcy on June 1 after a sweetened deal has been accepted by more bondholders.  So here’s the deal: its assets will now be sold to the new GM, the taxpayers will be owning 72.5%, the UAW (or its health care fund) another 17.5% and the remaining for the bondholders. In terms of government support, from Bloomberg,

The bankruptcy probably would last 60 to 90 days, said an Obama administration official who asked not to be identified because the talks are private. The Treasury will finance the trip through bankruptcy with about $50 billion, which includes $19.4 billion in current borrowing, GM said in a statement.

The new deal proposed to the bondholders gives them warrants to purchase an additional 15%, in two different occasions: first when GM reaches market cap of $15bn and the next when that number hits $30bn.  Take note, however, that the last time GM was on that level was in January of 2004.  Currently, it stands at less than $700 million. This deal increased approval from 20% more bondholders. However, all this as well as the 10% stake initially offered could go away if the company does not win support from those investors in a way that is satisfactory to the Treasury. In exact words, from the SEC filing.

The U.S. Treasury has indicated that if these statements of support are not received, the amount of common equity and warrants that it would propose be issued by New GM to Old GM would be substantially reduced or eliminated.

Apart from the 15% warrant provided to the bondholders, the UAW also gets the same benefit but at a much reduced rate – 2.5% and this is only usable if the market cap reaches the much higher threshold of $75bn. Who knows when that will happen. This difference could give the bondholders a bigger stake in the carmaker but Ron Gettelfinger just shrugs it off, saying “Would we have liked to have a bigger share? Probably. We worked hard to try to get that number up but it is what it is.” Furthermore, from WSJ,

He said the union doesn’t consider a bankruptcy filing for GM inevitable, though the UAW has made plans anticipating that the auto maker will seek protection from creditors under Chapter 11 of the Bankruptcy Code. In a bankruptcy filing, the value of holdings by current common stock owners is likely to be wiped out.

But even with at a ‘disadvantaged’ position, someone over at DealJournal is showing a little skepticism:

Nowhere in the memo [Modifications to 2007 Agreement], for example, does the UAW state that it is eager to make GM the world’s most competitive, efficient and profitable auto company. That’s what any shareholder should want.

Hand it to the UAW. The Treasury may have forced it to give some things up, but the UAW cut itself a sweet deal. “For our active members these tentative changes mean no loss in your base hourly pay, no reduction in your healthcare and no reduction in pensions.” In other words, as little change as possible.

I, myself, am a little skeptical about UAW but at least, they agreed to some concessions. That’s a start but I bet they’d try to make up for it in the future.  For now, enjoy the trip to bankruptcy GM.

Sources: Bloomberg, Wall Street Journal, WSJ’s DealJournal, SEC Filing

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