By on November 25, 2008

In recent congressional testimony, GM admitted that its experts are “exploring” Chapter 11 reorganization. At the same time, GM continues to argue that a bankruptcy filing is the nuclear option– it would vaporize jobs and inflict cataclysmic damage on the overall U.S. economy. While acknowledging the danger, many argue that reorganization is both necessary and unavoidable. They suggest that GM’s recreation should somehow take place outside of the time-tested legal process known as Chapter 11. Sentiment is growing that a taxpayer-finnaced “prepackaged” Chapter 11 is the best way to solve both GM’s business and financial problems, and perhaps of other automakers. Maybe so. Let’s have a look…

Why is a non-bankruptcy loan to GM a poor use of taxpayer money?

A lender to an insolvent company on the verge of bankruptcy wants its loan to be repaid. It would not allow loan proceeds be used to pay off existing liabilities. GM owes unsecured bondholders about $40b. There is no indication that bondholders have agreed to standstill, waive interest payments, or restructure the debt. GM’s Series D debt of $800m comes due in June 2009, when GM must pay the debt, default or get bondholders to extend the maturity date. GM owes trade creditors about $28b and owes another $34b in accrued expenses.

GM’s legal obligations to bondholders and trade creditors cannot be changed or modified without a bankruptcy case, or the written consent of each individual creditor, That’s a near impossible task. Attempting to reorganize GM outside of a legal proceeding would encourage creditors to holdouts for special treatment, delaying any chance at restructuring

A commercial lender supporting GM– which is insolvent on the basis of its balance sheet– would ask how paying the existing claims of bondholders and suppliers will help GM with its current cash flow problems. They would not allow loan proceeds to be diverted to unsecured creditors. Without a Chapter 11 case, taxpayer loans to GM could be used to pay interest on $40b of GM unsecured debt, and to pay the $800m Series D debt coming due in June 2009.

GM must also pay $7.5b to the retiree trust in January 2010,– another liability for which it does not have funds. Taxpayer money should not be used to bailout existing debt or to pay non-essential existing liabilities. The restructuring of GM’s payment obligations can be most quickly and effectively accomplished in a pre-packaged chapter 11 case.

What is a prepackaged chapter 11?

In a true “pre-packaged” reorganization, the debtor proposes its reorganization plan and solicits votes before they file for Chapter 11 protections. For companies with publicly traded debt and other securities, Chapter 11 gives them the chance to restructure its debts without the “normal” delay and expense of extended negotiations.

A partial “prepack” involves a pre-petition solicitation of certain classes of creditors (e.g. bondholders) and a post-filing solicitation of other classes of creditors (e.g. unsecured suppliers). If the parties have agreed in writing on how their claims will be treated under the plan, sometimes called a “pre-negotiated” prepack, pre-filing voting on the reorganization plan is not essential. [Under a GM reorganization plan, the common shareholders receive nothing and therefore do not get to vote.]

Bottom line: a prepack doesn’t have to address every issue of every creditor group. Smaller claims are usually resolved after a Chapter 11 plan is approved.

A prepackaged reorganization is not ideal for companies that want to terminate large numbers of unprofitable or burdensome contracts. However, GM qualifies. They’ve been restructuring/downsizing for a few years, implementing plant closings, laying-off employee and making other changes to address market realities.

A big advantage of Chapter 11 pre-pack: the debtor can quickly and easily sell assets and operating divisions (e.g. Hummer, AC Delco) to create cash for ongoing operations. The claims of persons affected by the sales are funneled into the bankruptcy court for expedited resolution. Disputes with creditors need not delay the sales.

What is involved in preparing a business plan and application for a chapter 11 “debtor-in-possession” loan?

In a prepackaged chapter 11 reorganization, the financing for the chapter 11 debtor is in place before the Chapter 11 case is filed. The financing often includes a commitment to provide the “exit” financing used to fund the debtor’s obligations– after creditors and the bankruptcy court approves its Chapter 11 reorganization plan.

Given the current state of commercial credit markets, the U.S. Treasury will have to commit to the reorganization plan exit financing. The reorganization plan will set forth the repayment terms for the existing secured debt, the new U.S. Treasury loan and the Department of Energy (DOE) loan.

As with any loan application, the starting point for GM will be its current assets and liabilities, its cash flow and its realistic projections. All of which go into a measured calculation as to the borrower’s credit worthiness and ability to repay the loan, with interest.

In Chapter 11 cases, the debtor prepares detailed projections and budgets, taking into account the reduction in its current liabilities that result when the case is filed. For example, after GM files for Chapter 11, it will no longer pay interest or principal on its unsecured debt. Chapter 11 lets GM stop paying liabilities incurred before bankruptcy. This will increase the cash available for operations. The debtor’s cash flow projections reflect all these deferrals and changes to current liabilities.

How will retiree claims be treated in a pre-packaged chapter 11 case?

GM retiree claims are– primarily– unsecured claims, As such, they have the same priority as bondholders and other unsecured creditors.

In January 2010, the UAW and its related retiree trust will assume most of GM’s retiree liabilities for current retirees. In January 2010, GM has to pay the retiree trust $7.5bin cash and other transfers of assets. The trust also receives a $4.4b GM convertible debt issue– which is an unsecured claim against GM.

Over ensuing years GM must pay the trust additional amounts estimated to be between $10b to $17b. A basic rule of bankruptcy: claims having the same priority in payment get the same treatment under a Chapter 11 reorganization plan. Thus, all unsecured claims, including claims of the retiree trust, should get the same treatment.

In a pre-packaged Chapter 11 case, creditors can agree on different treatment of claims having the same priority. But this invariably leads to more delay and expense. In a GM chapter 11 case, these future payments to retirees are frozen. They’re treated as unsecured claims; they’ll get a distribution under the GM reorganization plan.

What happens at the beginning of a pre-packaged chapter 11 case?

Despite assertions that reorganization in Chapter 11 is not a realistic option, a company with pre-arranged financing is quite able to operate in Chapter 11. In nearly every mega case where a restructuring of an operating business is contemplated, the bankruptcy court enters “first day orders.” Basically, these are all the court approvals that the business needs to continue to operate its business in the ordinary course. First day orders deal with everything from financing, to advance payments, approval of bank accounts, authority to honor customer warranty claims, and reimburse dealers— all the details needed to prevent disruption of the operating business.

While it is definitely a lot of paperwork, legal and turnaround professionals do this type of work every day. The courts routinely approve first day orders designed to save operating businesses.

GM’s assertion that millions of jobs will be “lost” ignores the simple fact that companies continue to operate their businesses while in chapter 11, albeit under a great deal of scrutiny. GM already finances its largest suppliers (Delphi and American Axle) and has a receivable financing program for other suppliers so that the suppliers have access to cash.

These programs can continue in Chapter 11, or even be improved. For example, GM could ask the reorganization court to approve cash pre-payments to essential suppliers. The past due claims of suppliers are unsecured claims. In bankruptcy, these claims have the same priority in payment as GM’s unsecured debt. In planning a prepack, it’s not unusual for the debtor, with the consent of its major creditors, to prepay critical suppliers before the prepack is filed.

What will creditors get in a pre-packaged GM reorganization plan?

A GM reorganization plan must be based on a realistic projection of future profitability. Future cash flows will determine the enterprise value of the reorganized company, and hence the value of new common shares which will be distributed under the plan. Fortunately for taxpayers, in a Chapter 11 case the debtors’ financial projects are open to public scrutiny and to the comments and objections of creditors affected by the Chapter 11 plan.

GM will not have resources to make a cash distribution to creditors. So the reorganization plan will involve a distribution of newly-issued debt and new common stock, with the old debt and old common shares being extinguished. The new common stock will be listed on a national exchange, It wil,l have an immediately ascertainable value based on the financial projections that GM will have to produce to get creditor approval of its Chapter 11 plan.

Under the reorganization plan, the trust for retirees should not receive payment on the $4b short term note, the $4.4b long term note, or its other claims against GM. But will the trust will get its pro rata share of the newly issued debt and common stock of reorganized GM.

Since the new common stock will be publicly traded, it can be sold to fund retiree obligations assumed by the retiree trust. In a Chapter 11 case, creditors can also agree that retirees will get better treatment than is customary. But this requires a vote of creditors and special treatment that’s likely to be contentious, and delay the Chapter 11 case.

Government financing for a GM pre-packaged reorganization

A U.S. Treasury non-bankruptcy equity investment in GM (i.e., purchase of GM preferred stock) is a bad investment for a company already balance sheet insolvent by more than $60b. A primary beneficiary of an equity type investment: the existing unsecured bondholders and unsecured creditors, who would have a claim on the proceeds.

Some suggest that taxpayers should make an unsecured loan. Any such a loan would have the same priority as the other $105b of existing GM liabilities, making loan repayment unlikely. Taxpayers should demand that any loan made to GM be made only in connection with GM’s Chapter 11 filing, that it be fully secured, and only disbursed pursuant to detailed written budgets.

Naturally, lenders to Chapter 11 debtors should insist on competent management. They should also hire their own accountants and reorganization professionals so that the lender has an independent analysis and opinion of the debtor’s viability, business plans and the “viability” of the debtor’s goals and financial projections.

In a pre-arranged Chapter 11 case, the U.S. Treasury could extend to GM a secured debtor-in-possession line of credit for say $40b, a line of credit secured by a first security interest on all GM assets, being junior only to GM’s existing secured line of credit of $4.4b.

A portion of the U.S. Treasury line of credit should be available to support essential suppliers through loans, letters of credit and pre-payments. On the first day of a pre-packaged Chapter 11case, the bankruptcy court is likely to give interim approval to a portion of the total credit line. Ten day’s later, they’ll have a hearing to approve the balance of the loan facility.

Since the government lacks experience in administering secured loans to insolvent companies in Chapter 11 reorganization, it might be preferable to have the loan guaranteed by the US Treasury. Funds would be advanced periodically by a consortium of financial institutions experienced in lending to Chapter 11 debtors. They’d be better able to monitor day-to-day compliance within the terms and covenants of the loan.

This would not eliminate oversight by the US Treasury and Congress. But it would delegate the devilish details of loan administration to experts.

GM’s Chapter 11 reorganization plan can be expedited

Given the importance of US automakers to the economy, and the need for a successful reorganization to preserve jobs, a GM Chapter 11 reorganization case will be expedited. The chief judge can assign multiple judges to handle different aspects of the case, recognizing that speed is essential to a successful reorganization. Bondholders and other creditors should support expedited handling of their claims– a successful reorganization is the best way for creditors to realize value.

A pre-packaged plan can be approved quickly; the plan has been negotiated and accepted by creditors entitled to vote before the Chapter 11 case is begun. In a partial “pre-pack,” the largest creditor groups informally approve the general principles of the plan before the case is filed. Formal solicitation and voting take place under the supervision of the bankruptcy court.

By using accelerated schedules, a prepack can be accomplished in months, not years. Pre-filing negotiations over the terms of the reorganization plan often result in agreement on difficult issues: payments to suppliers, support for the dealer network, honoring customer warranty claims, and even changes to employee work rules and benefits. All of these agreements can be rapidly documented.

Treatment of claims and shareholders under a GM reorganization plan

Given GM’s own statements about its shortage of cash for the foreseeable future, it’s unlikely that GM would make any cash distributions to existing creditors. Cash will be needed to retool plants and complete ongoing restructuring efforts. It will also be needed to eassure trade creditors that enough cash is available– so that trade creditors will extend new trade credit to GM.

Under a reorganization plan, creditors and shareholders are put in classes. Creditors having the same priority in payment often grouped in the same class. A simple GM reorganization plan would have the following elements:

-Taxpayers have a $40b first lien on all GM assets for monies lent by the US Treasury and the DOE. If GM’s debtor in possession financing cannot be refinanced by commercial banks, then taxpayers will finance GM’s exit from Chapter 11. Taxpayers should get warrants for 10 percent  of GM’s new common shares, to reward them for the risk of financing GM in Chapter 11.

-GM’s existing $4.4b secured line of credit will retain its lien on GM’s assets and be extended.

-Consumer warranty claims are expressly assumed under the Chapter 11 plan.

-$40b of unsecured bondholder debt will receive its pro rata share of any new unsecured debt issued by GM and a pro rata share of GM’s new common shares. The common shares will trade on the public market and will have an immediately realizable value. No interest will be paid on any new debt until all taxpayer loans to GM are paid in full, with interest

-Trade payables of about $39b (the $17 to $27b owed to the retiree trust,) and any other unsecured claims get their pro rata share of any new debt and new common shares.

-The retiree trust may merit special treatment, although potential future liabilities to the trust of $27b not only would weigh heavily on GM’s post reorganization success, but also would depress the market value of any new common shares issued by GM. With creditor consent, the retiree trust could receive subordinated debt, with future maturity dates timed to GM’s future profitability. Without access to GM’s cash flow projections, it is hard to suggest what treatment would be fair to retirees while still protecting GM’s other creditors.

-Old common shares do not vote on the plan, get no distribution, and are canceled. Existing stock options are eliminated

-A new Board of Directors selected by creditors is in charge of reorganized GM, with board representation for the major creditor constituencies.

GM’s Hypothetical Post-Reorganization Balance sheet

Projected Assets: $90b

Estimated Liabilities
$4.4b: existing secured line of credit
$10b: secured term note to US Treasury
$12b:  secured term note to the Department of Energy (GM’s share of the DOE funds for alternative vehicles)
$1b: trust or secured letter of credit established to guarantee payment of consumer warranty claims
$2b: current tax liabilities

Subtotal: $29.4b of secured and priority claims

$9b: accrual for consumer product warranty liability
$10b: for current claims arising in during the Chapter 11 case which will be paid by GM in the ordinary course of business
$5b: new unsecured debt (payment in kind) set aside for miscellaneous claims, with maturities deferred and no cash interest payment
$5b: subordinated debt, issued with laddered maturity dates timed to fund the retiree trust only if it runs out of money in the future
$15b: accrual for pension and retirement obligations for current employees
$5b: leases and other obligations, including liabilities to foreign subsidiaries

Subtotal: $39bof unsecured debt and unsecured liabilities

Total estimated liabilities: $78.4b

Equity distribution
90 percent of newly issued GM common shares distributed to bondholders, the retiree trust, and other unsecured creditors
10 percent of new equity reserved for the US Treasury

Final thoughts on labor, management and Detroit

The UAW represents labor in negotiations with GM management. GM’s management, not labor, has been behind the GM steering wheel as GM went over the cliff of Insolvency. UAW negotiators are tough, well-informed professionals. The UAW is not inflexible; witness its recent agreement to defer $1.7b of payments to the retiree trust, a deferral which has helped GM stay alive. The UAW has its own staff of accountants and restructuring professionals who are prepared to sit down and negotiate and help GM propose a viable reorganization plan

GM’s Board of Directors, its management and the UAW have made mistakes. But their serious efforts to restructure GM should not be doubted. Rick Wagoner has spent 30 years at GM, but his efforts have been overtaken by circumstances. In reorganization the board will be replaced, as will some of the operations managers and senior executives.

Undue criticism of GM’s management and the UAW distracts from the need to urgently develop and implement a viable pre-packaged reorganization plan. GM’s management needs to get down to business and develop a reorganization plan that will protect taxpayers and earn the support of Congress.

Anyway, GM’s chapter 11 case should be filed in Detroit. The birthplace of the American auto industry should be the place of GM’s rebirth.

(Mr. Tilton is a corporate bankruptcy attorney. He represented creditor banks in the Chrysler restructuring and has represented creditors and debtors in prepackaged Chapter 11 cases. He is the editor of the book Bankruptcy Business Acquisitions, Second Ed., published by the American Bankruptcy Institute in 2006)

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46 Comments on “Editorial: General Motors Death Watch 219: Rrrrrrescue Pack!...”


  • avatar

    much as it would cost me personally, the Libertarian in me says screw it, don’t give the rat bastards a bent nickel.

  • avatar
    Ken Elias

    Excellent piece. This is how I imagine the deal will go down, although having knowledge of federal money may alter the bargaining stance of the creditors. Hence, Congress must hold firm and not commit to any dollar figure without an actual and realizable plan from the Company.

    However Mr. Tilton, the piece is slightly incorrect in suggesting that GM has been restructuring and is now merely overwhelmed by circumstances. A history of the last 40 years of this company clearly and vividly illustrates endless reorganizations and restructurings in North America and Europe, always failing to meet the goal of delivering class-leading products (in general, with some notable exceptions) as compared to its competitors.

    I would note that many of us have been witness to the danger signs flashing for years, always ignored by GM’s management and BoD. Jerry York, as a Board Member himself recently, called for an immediate set of changes that the BoD failed to heed. Going back more than a decade or two, Ross Perot called for similar changes and he was simply bought off.

    One other point that needs additional thought deals with the actual trade payables to suppliers. A receivable financing plan for post-petition claims, while needed, will not address the immediate needs for payment on pre-petition claims. The supply chain currently itself rests on fragile grounds, with approximately 30+% or more of suppliers themselves in perilous danger of collapse. These suppliers cannot settle their claims for “paper” assets on pre-petition claims, instead, they must continue to receive cash as lifeblood. It is more than just Delphi and Am Axle that are cash critical, and the total dollars are likely measured in the multi-billions. Although unsecured as creditors, one can make the argument that they deserve some kind of special classification. Any special treatment though could “upset the applecart” in obtaining consensus among the class of unsecured creditors to a negotiated settlement.

    The single biggest unknown has to do with dealers’ continued ability to obtain wholesale financing on new vehicles and lenders willingness to buy retail paper as well from a bankrupt automaker. This industry depends on the flow of credit, and a GMAC bankruptcy could also derail any GM reorganization itself. I do believe that the public will buy vehicles from GM during its trip through court, although the “normalized” sales rate would likely be reduced by 25% or more. Of course, in the confusion of shutting down brands, the real impact may never be known due to fire sales on distressed merchandise.

    But overall, informative and concise. Thank you.

  • avatar
    no_slushbox

    A car blog is getting content that puts WSJ and the Economist to shame. My anger at the possibility of a bailout is primarily that the only parties a bailout will harm more than the taxpayers are the big-3 themselves; not that I hate America and want the sun to burn out. However I have not been able to present that this persuasively.

    Richard N. Tilton has illustrated a road forward for GM that is far better for GM’s long term viability than anything Rick Wagoner will present next week. In Rick’s defense I don’t think he likes the “[o]ld common shares do not vote on the plan, get no distribution, and are canceled. Existing stock options are eliminated” part.

    Between the opposite extremes of preventing big-3 Bankruptcies at any cost (making American Leyland inevitable) and following a libertarian hands off dogma that may lead to liquidation is the grey area that saves GM and the taxpayers – Tilton has given a detailed, experienced outline of that process.

    Government intervention is needed, but without Chapter 11 it is in vain.

  • avatar
    4speed

    Mr. Tilton, the structure and logic of your presentation is enlightening.
    But…many of the nuances of your possible solution call for a level of commitment to excellence that, for me, are cause for concern.

    Nevertheless, I hope that the “Big 3” can return to a degree of solvency.

    t

  • avatar
    yankinwaoz

    Thank you Mr. Tilton. That was excellent.

    There is one wildcard that has not been discussed, that could derail all the planning. What incentive is there for the UAW workers to make quality cars after they have been screwed over by GM? Lets assume that they opt not to strike. How does GM plan to make quality, competitive products with an angry and pissed off workforce?

    Will a restructure have to replace the UAW with non-union workers? It seems like a damned if do, damned if you don’t, problem. After all, what is the point of all this if GM can only make crap cars that no one will want?

    I think the UAW will not only have to sell a new agreement to their members. But more important, the UAW will need to sell the buying public on their skills and professionalism. They will need to convince potential buyers that in spite of them getting a serious haircut on pay and benefits, they are committed to making the best cars on the planet.

    I think the only way to do that is to give the UAW a nice chunk of the new GM. Perhaps 20% UAW, 80% Tax Payers.

  • avatar

    Incredible piece, Mr. Tilton. I’m more willing than Ken to grant that, in recent years, GM’s management has made more progress than I expected it to. Just not enough.

    It is not clear to me how flexible the UAW will be. Of course, it shouldn’t be clear, because they can’t afford to appear flexible, even if they are.

    My main fear is that the government will shy away from forcing a Ch11 on GM, and the loan will end up receiving pennies on the dollar like all current debt. After that, I fear that the government sees a chance to force GM to agree to produce cars people don’t want to buy, and so will actually harm GM’s viability.

  • avatar
    Ken Elias

    One more comment. Any “surrenders” by the UAW must also benefit Ford – pattern bargaining should go both ways, up and down. If Ford stays out of bankruptcy, it too must receive the same givebacks granted by the UAW to GM in bankruptcy.

  • avatar

    yankinwaoz,

    What you and many others don’t seem to realize is that many of today’s repairs aren’t due to errors during assembly. Instead, the parts aren’t made precisely enough, or components fail. The worker on the line has no control over these things.

    TrueDelta conducts a vehicle reliability survey, and actually posts the descriptions of all reported repairs. The latest set of results is here:

    http://www.truedelta.com/latest_results.php

    Go to any GM model, and click on the model name. That will take you to a page with the repair descriptions. See how many could have been the fault of a line worker in the assembly plant. Usually not many.

  • avatar

    insolvent |inˈsälvənt|
    adjective
    unable to pay debts owed : the company became insolvent.
    • relating to insolvency : insolvent liquidation.

    As GM hasn’t shown a profit in years, it’s not really a question of whether they should file for bankruptcy, but of how long people are willing to let GM continue while not showing a profit – this time on the public teat.

  • avatar
    John Horner

    Might it not be simpler to simply nationalize the assets of GM and create a “good company / bad company” split in which the assets which are useful going forward are bought at appraised value by the government? Whatever cash that yields goes to pay off creditors in some pennies on the dollar scheme for the bad company. The assets could be seized in an eminent domain type action without taking on the past liabilities. Then the feds could appoint a receivership operating board with the objective of taking the restructured company back onto the public markets in 2-5 years. The only current stakeholders who are actually critical going forward are the suppliers, so they probably need to be given top priority for payment. Forget all the usual bankruptcy precedence. If this is a national emergency requiring extraordinary intervention then the usual rules of the game don’t really apply.

    If the taxpayers are going to save this sucker, why should they only get a measly 10% shareholding? Without taxpayer intervention the enterprise is going to crash and burn and be worthless. Why should we/they take all the risk for a minuscule upside?

    I see no reason to leave any of GM’s management in place or to pay them another dime. They have not been effective stewards or leaders of the enterprise and their serial restructurings have been nothing more than a long slow dismemberment. Don’t be fooled by the Volt hype. GM has had the miracle cure just around the corner for decades now.

  • avatar
    romanjetfighter

    Woooooow. Very informative and straight forward. I don’t understand what half of it means, though. :P

    What about Ford/Chrysler? If one of them gets money they all do right?

    If they get the bailout money and the stocks are canceled, and if they don’t get the money the stocks are canceled anyways why the stock price at 3 something when it’s pretty much guaranteed to be 0?

  • avatar
    canuck

    As a GM Canada retiree, I was wondering about something I have never heard raised before.

    When I retired, I signed an agreement with GM that outlined my pension and benefits. I signed that I agreed with their calculations.

    The agreement also stated, that by accepting the agreement, I gave up any future claims to employment with GM and was terminating my employment with them.

    My question is this.

    If GM violates the terms of the retirement agreement, regarding pension payments and benefits, do I have the legal right to return to work? Would the retirement agreement be made null and void?

    Mandatory retirement was abolished in Canada last year, so age would no longer be a factor. Also, many GM retirees are not that old and are capable of returning to work, given the 30 and out provisions.

    If GM should file for bankruptcy, I certainly will be obtaining independent legal advice, from a capable law firm, regarding the right to go back to work.

    I have no information if US workers sign the same types of agreements at retirement.

  • avatar
    seoultrain

    Whew, can’t even wrap my head around those numbers at the moment. Great insight.

    My question: Is there any way to get these benefits of reorganization without actually calling it a bankruptcy? Perhaps calling it a “government reorganization privilege”?

    If people bought Hyundais before they were decent, they will buy bankruptcy-GMs, but not many. C11 may take up to a decade before GM is back on its feet. If something like what I suggested above is possible, the absence of big, scary bankruptcy looming will likely cut that time in half.

  • avatar

    Mr. Tilton,

    Thanks for taking the time to lay this out. There’s still the issue consumers not wanting to buy cars from a firm in Ch. 11.

    A couple of questions.

    Are there any examples of large companies that sell big ticket items like cars going through a Ch. 11? Any large builders (let’s say on the scale of Kaufman & Broad) who continued to sell homes through a Ch 11? I’m not sure if a house is a good comparison because while there are new home warrantees I don’t think they are quite as critical a factor in purchases as with cars.

    How is GM different from Citi or any of the larger banks receiving money through the TARP? If Citi has hundreds of billions in loses and only $75 billion in cash on hand, aren’t they insolvent?

  • avatar
    Rix

    If, after this, GM still runs out of cash, what is the course of treatment? Second round of prepackaged bankruptcy, ala United Airlines, or shutdown?

  • avatar

    @Rix

    According to Saturday Night Live’s parody, they’ll be back for new tranches of money – which is actually too close to the truth for comfort.

  • avatar
    jolo

    Who are the major congressmen and women who should get a copy of this article? It will give them enough ammo to suggest to GM that they should file for a prepackaged chapter 11.

    Anyone have the e-mail addresses of the congressmen and women so we can send them this link?

  • avatar
    menno

    Well, canuck, with your information in hand – and I’m certain that you have a legal leg to stand on by the look of things – let’s follow that line of thinking a little re: GM’s overall position.

    Assuming similar situations in other countries exist, and that GM simply can’t “dodge” out of their legal contractual obligations *

    Ergo, GM might simply have to declare Chapter 7 and close down worldwide. End of story, end of company.

    Not to put too fine a point on things, but under this circumstance, I presume you’d get no more pension at all, except as the Canadian government felt the (legally required?) need to stand in and deliver (pennies on the dollar?). Just so that you’ve thought out the possible ramifications of your just and legally correct decision.

    Because, knowing what you just indicated, and with my suspicion that 60% of GM auto sales would evaporate in a Chapter 11 (since as many as 80% of the public say they quite rightly would not buy a car from a company under bankruptcy), I’d say that legally requiring that you and probably hundreds of thousands of other Canadians show up for work at CAW pay rates at GM when there is likely to be virtually no need for your services at all, will make the whole Chapter 11 pre-packaged scenario a total non-starter for everyone. And as I say, I’m pretty certain that the German and Swedish contracts are probably similar, at the very least.

    * unlike the US government with which I signed a binding contract to offer my services for 6 years in 1976, four years active military duty and two inactive – I lived up to my end of the bargain and they unilaterally changed their end of the contract without any discussion or arbitration with me. I lost all of my unused GI bill. Also, during the four years active duty, there were obviously two sets of rules – ones for “them” and ones for “me”. Furthermore, during the Carter administration, two times I went unpaid (along with all other Government employees) for as long as 3 weeks (work without pay and under penalty of jail on one’s departure from work = SLAVERY).

    So I’m quite familiar with being at the short, sh*tty end of the stick, canuck. Started out my adult life with that situation, then came out of the military to face yet another economic recession after having gone INTO the military due to an economic recession.

  • avatar
    dpeppers

    Hmm…insightful. Buickman ….where is the bloodletting of the dealer body. Where in this piece is the dismantling. As a “full-line” (cad chev pon bui gmc) dealer (since 1991) I see where myself and my peers are at the greater mercy of courts (and this one). What happens to my inventories of unsold vehicles. What happens to the investments in property and buildings (remember the pundits are warning of the commercial property collapse next). Who decides which stores go and which stays. Your assestment of jobs lost did not address the reduction of dealer population. How many remain? From the court of public opinion around 2000? 3000?

    The drive for your next warranty repair will give your and your spouse (or whoever) plenty of time to share the days business.

  • avatar
    highrpm

    It still blows my mind that the media, and Congress apparently, are so eager to jump on the bankruptcy solution for the automakers.

    Why not do the same for AIG or Citi? At least fewer folks will lose their jobs in those industries.

    Why not make strings attached to the bailout, something like $1 salary for the CEOs and elimination of their bankruptcy-proof parachutes. If they can’t just skip town with a bag of money, then maybe they will start to take their jobs seriously instead of just running these companies into the ground and holding out for bankruptcy.

  • avatar
    menno

    Well said, highrpm. The thing is – once the “gummint” starts down this trail – giving out billions upon trillions of dollars to “save” businesses (and their bankster friends, to start with) instead of letting (business) nature take its course – just when do we finally decide that mom & pops ice cream shop doesn’t get $1 billion to “bail it out too”?

    I honestly believe that historians will point to October 3, 2008 as the end of the Untied Status of Amerika. It started out $700 billion (plus $150 billion in “bribes” to grease the skids) and now less than two months later, it seems as if the total “bailouts” thus far amount to ELEVEN TIMES THAT. $7.7 TRILLION.

    That’s roughly 1/2 a year’s GDP for the US before the recession started.

    Just as I told my friends when the stock market was at 14,000 (this is obviously not sustainable), I’m going to share with my B&B friends here at TTAC. Obviously, this kind of thing is also not sustainable.

    Once next summer comes, which will forever be known as the summer from HELL going forward, we’ll start to realize that the “GM problem” is the least of our concerns.

    This is, however, an extremely well written piece. Kudos.

  • avatar
    Zarba

    Thanks, Mr. Tilton. A very well-reasoned and thoughtful piece. This is why I read TTAC. If only the Wall Street Journal would hold to the same standard.

    That being said, I think that dppeprs hit one one major issue not addressed that has to be dealt with: the bloated dealer network.

    I think it’s fair to say that a reorg’d GM would have to drop thousands of dealers. 40-60% of their dealers would be cut. GM has thus far shown no interest in dealing with this problem, and they have not addressed it in any of their “plans”.

    Overall you present a cogent and thoughtful blueprint for GM’s prepackaged bankruptcy. Unfortunately, since the government is involved, the likelihood of its implementation is somewhere south of nil.

    We’ll see a crippled GM linger on for a couple more years, constantly on the verge of collapse, until Wagoner is forced out. The new GM CEO will file for bankruptcy, but it’ll be too little, too late. All the cash and assets will have been depleted, and GM will be forced to liquidate due to lack of a viable business plan.

  • avatar
    Matthew Potena

    Great article, Richard. As an attorney, car lover, political junkie and member of TTAC, here is my prediction of what will happen.
    GM – Prepack bankruptcy with some possible help from the government. Maybe the help will be in the form of cash and/or guarantees for the new car warranties.
    Chrysler – Chapter 7 and parted out to the Chinese and Koreans.
    Ford – Will use the GM and Chrysler examples to browbeat the unions and creditors to give them the same concessions, and will muddle though. Also, as Ford has the most viable business plan, and the most capable CEO, they will rightly claim in their advertising that they did not need “help”.

  • avatar
    JT

    Best.
    Article.
    Ever.

    Structured, clear and factual.

    Thank you!

  • avatar

    Lots of good info to bring us gearheads up to speed.

    Does anyone know the intricacies of the VEBA deal? Sounds like Ford has their share pushed into the pot, but if GM (or Chrysler) can’t foot their share – then is it even possible to reap the so called “benefits” of the magic 2010 UAW liability offload? The horizon of “better days of competitive costs” seems like it can’t happen.

  • avatar

    the simple question is:

    Who is going to throw hard earned money on the hood of a GM and say “I’ll buy it” after the file Chapter 11?

    Answer: nobody.

    That is why they are reluctant.

  • avatar
    jolo

    Who among us is going to buy a vehicle from an automaker who has filed for bankruptcy protection?

    Answer: nobody.

    Actually, I know lots of younger folks who will buy from them so they can get out of their shitboxes and into a new or newer car for a price they can afford. They figure that they will only need oil changes periodically, since, you know, it’s new and their new car reliability data is almost as good as the foreign makers. Their folks will cosign a loan and they’ll be off. Yes, I know too many of these kinds of people and there are probably lots around the country who are salivating at the prospect.

  • avatar
    golf4me

    Nice piece, but he failed to address two of the MOST IMPORTANT issues which make C11 even halfway attractive for GM!

    1)SERIOUS UAW concessions forced upon them by Govt. Or, abolishment of the UAW contracts altogether.

    2) Ability to shed brands and dealers.

  • avatar
    Ken_DFA

    Editorials like this are the reason I hit the TTAC page at least 6 times every day.

  • avatar
    Ralph SS

    So….no speculation on how those bankruptcy-proof pensions will fare?

  • avatar

    @Jerzjt

    Who among us is going to buy a vehicle from an automaker who has filed for bankruptcy protection?

    Answer: nobody.

    I disagree. The GM LOYALISTS won’t consider buying anything other than a GM vehicle. They literally can’t comprehend not driving/owning a GM.

    The question is what percentage of GM’s customers are Loyalists? 40%? 50%? 60%? 70%?

    My best, humble guess is 60%, because I don’t believe there are that many people left who want to buy a GM product (when given the chance to buy a Honda or Toyota). That said, that 60% gets smaller every day…as they are literally dying off.

  • avatar
    Ralph SS

    So….no speculation on what happens with those bankruptcy-proof pensions?

  • avatar
    netrun

    Awesome piece Mr. Tilton. Am now going to the library to borrow your book. Hope it will as riveting a read as this article!

    I agree with a lot of other people here that the UAW will be in quite a pinch to remain viable since their work rules, pay rules, and pension rules will soon become obvious nooses for GM’s recovery.

    I disagree with others that GM in bankruptcy won’t sell any cars. With the taxpayers having “skin” in the game, I think many more people will look at a GM car rather than just buy another Camry. I can see the GM using the restructuring as a rallying point for their marketing.

    A serious issue for GM is in determining an a meaningful projection of future cash flows. Since they lose money on so many vehicles and will have to “fire sale” them for the next year or so, getting good estimates will have a ginormous impact on the viability of their plan.

  • avatar
    mikey610

    MgoBLUE:

    Agree with you 100% (about the 60%, that is).

    In fact I would argue that this ‘blind loyalty’ problem has actually hurt GM over the years – many of the loyalists will buy whatever POS they (GM) put out.

    The part about them literally dying off is so true…avg. age of a Buick car buyer = 72.

  • avatar
    ermalm

    One thing I have not seen addressed as yet is what will the UAW do? I would love someone more in the know to speculate.

    The assumption is that through a C11 the UAW contracts would be re-negotiated down. Will the UAW rollover on that? I do not think so.

    I think the UAW will pull out all stops, use every connection and political IOU to gain a minimal reduction in pay/bene’s.

    Who will stand up to them?

    This could be the first real test of the new President.

  • avatar
    JoeEgo

    Following this article and previous items on UAW contracts and compensation, can somebody provide details on what things look like for next year? In other words, if UAW labor rate amounts to $73 per employee (including retirees and other junk in that figure), how does that change for 2009 with the VEBA? Are most of the retiree costs being moved out of GM’s portfolio?

    And what about the jobs bank? Is there any other industry in the US where people are paid full & partial salaries for any length of time after having their position eliminated?

  • avatar
    50merc

    Ralph SS: “…what happens with those bankruptcy-proof pensions?”

    If Wagoner, Lutz, et al have “bankruptcy-proof” pensions, I think it would be from GM purchasing annuities from an insurance company. An annuity that is already funded (paid for), and is owned by the recipient, would no longer be an obligation of GM.

    Mikey610: [re: GM loyalists dying off] “avg. age of a Buick car buyer = 72”

    Good! There should be a good supply of mint-condition, low-mileage Park Avenues for another decade or so. When I’m in my dotage, I’ll need a Buick.

  • avatar

    Started out my adult life with that situation, then came out of the military to face yet another economic recession after having gone INTO the military due to an economic recession.

    Frankly, I’d rather have people serving our country out a sense of patriotism, like my daughter who just joined the Navy, than out of economic need.

  • avatar

    Anyone have the e-mail addresses of the congressmen and women so we can send them this link?

    Jolo,

    I was going to be snarky and say that perhaps you may have heard about these newfangled things called search engines.

    Instead I’ll just suggest that you try:
    http://www.house.gov
    http://www.senate.gov

    While you’re at it, you might want to mention the $800 billion that the federal government has looted from the industrial Midwest over the past three decades.

  • avatar

    Why not make strings attached to the bailout, something like $1 salary for the CEOs and elimination of their bankruptcy-proof parachutes.

    Would you run a multibillion dollar company for $1 a year?

    It would make more sense to pay them a decent six figure salary (remember, we have over 50,000 federal employees who make more than $100K a year) with million dollar bonuses contingent on turning the company around and getting it profitable.

    Whenever possible it’s best to motivate people with their own selfish interests.

    The problem with high CEO salaries is that too often they are independent of actual results.

    I didn’t have a problem when the NYSE paid Grasso $150 million a year, since the exchange was very profitable under his management. Elliot Spitzer didn’t think it was moral for Grasso’s bosses to decide he was worth it. Of course, Spitzer may not be the best judge of what’s moral and what’s not.

    Ronnie Schreiber
    Motorobilia

  • avatar

    it’s new and their new car reliability data is almost as good as the foreign makers.

    That’s true for GM. Ford actually is statistically equal to Toyota and Honda in terms of new car quality. Interestingly, the German brands are poorer than the domestics.

  • avatar
    mel23

    Who would buy a GM product post BR? I’ve been giving that some thought lately and I think I would/will. I’m needing a full size van of the kind made only by GM & Ford; Sprinter is too expensive. So let’s say it comes to GM or Ford. Assuming Ford would still be alive and could be expected to survive for a while (not likely IMO), it would come down to acquisition cost, features, and warranty. If the GM product had preferable features, and the initial cost was low enough to offset costs that would have been covered by a warranty, why not go with the GM product?

    People at the 2.8 who have access to sales data by day will be able to track sales before and after the likelihood of BR getting to the public mind as it has since the fiasco in Congress. I’d think it’s already taking a toll.

    If we think of dealers and suppliers as critically ill patients in a hospital ward, prudent care would involve some kind of monitoring of vital signs, or at least taking a temp now an then. I wonder how much is known of the short term viability of dealers and suppliers. I have to think nobody is paying much attention. If lots of dealers start going down, will GMAC or local banks be flooded with cars they don’t want? And what will they do with them? Another dying dealer surely won’t be interested. Meanwhile, the income stream from the dead dealer is gone so the lender is stressed even more. Etc. We’re at the point where some serious govt money is going to flow no matter what, so some planning for a wind down might help.

  • avatar
    jolo

    …their new car reliability data is almost as good as the foreign makers…

    Most automakers can be near the top the list for a year or so, but those that are in the top 5 or 10 for over 10 years in a row are the ones that see their market share increase on an annual basis. The domestics can’t get there AND stay there. Show me any of the debt3 in the top 5 or 10 for 10 years in a row and I’ll CONSIDER one of their vehicles. Consider it, but no guarantee I’ll leave my present automaker. Been burned too many times by all three so now I have conditions before I’ll consider one of their vehicles.

  • avatar

    I’m needing a full size van of the kind made only by GM & Ford; Sprinter is too expensive.

    You might want to look at the Ford Transit to see if it has enough room. I can’t remember when it’s due to hit showrooms but I’ve seen at least one US spec preproduction test vehicle in my neighborhood. I live in a radio/tv farm and most of the transplants as well as the domestics test their cars for radio frequency interference around here.

    There’s one spot I know where all you’d need to do is set up a webcam & a dvr and you’d have plenty of spy shots.

  • avatar
    ZoomZoom

    “…it’s new and their new car reliability data is almost as good as the foreign makers.”

    Sorry, NOT GOOD ENOUGH for me. Chapter 11 or not; it doesn’t matter.

    Poor design, incomplete or incorrect assembly, dealer and service department mistreatment/indifference have chased me away.

    My experiences are only anecdotal, but at least at the BMW dealership, I got no guff. What I got were profuse apologies for my inconvenience, and proper correction of the problem. Rarely got treated that nicely at a GM dealership.

  • avatar
    joeaverage

    New car quality = warranty.

    Want a car with good quality when I’m paying for the repair bill i.e. well after 100K miles.

    Yeah, yeah – tough to zero in on way a problem occurs at say 16)K miles. Is it the owner’s fault for treating the car poorly? Is it the aftermarket parts that were installed along the way?

    Besides we aren’t supposed to keep our cars that long – we’re supposed to replace them long before that.

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