Meanwhile, in an Alternate Universe… GM's 100-Day Pre-Negotiated Chapter 11

GM’s plan to Congress for its long term financial viability results in GM being insolvent in 2012 in amounts ranging from $30-43 billion. It’s not much of a plan for long term viability. UAW management points out that GM’s plan leaves some creditors making no concessions and correctly asks why it should re-schedule payments or make other concessions when other creditor groups make no concessions. While chapter 11 is no panacea, it is far better to fully restructure GM in chapter 11 than to support the half-baked plan now before Congress. Some of the problems with GM’s current plan…

GM says it will negotiate with some stakeholders to reduce liabilities, and will try to conclude negotiations by March 31, 2009. The plan also requires taxpayers to give GM $10 billion before March 31, which lessens the incentives creditors have to make concessions. So, who benefits and who gets hurt under the GM plan?

— trade creditors (owed $28 billion) make no concessions, even though today their claims are worth about 20 cents on the dollar, roughly the amount at which GM’s bonds trade. The trade claims have the same value because, like bonds, they are unsecured claims and have the same level of priority. Why should the UAW retiree trust or bondholders reschedule payments when suppliers make no concessions?

— the UAW and the retiree trust make no concessions in the amount of $20 billion owed to the trust, and the GM plan is silent on any deferral of the $10 billion of payments due to the retiree trust in 2010, although it appears that re-scheduling of payments is on the table, but only if GM can present a truly viable balance sheet, which it has not yet done

— Bondholders benefit by getting current interest payments, since there is no discussion of deferring current interest payments to GM bondholders. Does GM think labor should reduce its wages so that interest payments can be made to bondholders?

The plan indicates that bondholders are expected to convert $20-30 billion of debt into either other debt or equity in what some are calling a “distressed exchange.” No mention by GM of what happens to the remaining $23 billion of bondholder debt which will go into default unless taxpayers fund the interest payments, a waste of taxpayer money.

There should not be a partial restructuring of GM’s bond debt when it clearly is unable to support the debt or afford to pay interest on it without taxpayer support. There is no discussion of why any bondholder would convert its debt to equity when after GM’s plan is fully implemented the company will still be insolvent in 2012 by at least $30 billion.

— Under the GM plan taxpayers will be funding current payments to retirees, interest payments on debt, and payments to trade creditors/suppliers, none of which would have to be paid in a pre-negotiated chapter 11 case.

— GM seems prepared to give taxpayers “senior status,” but not a senior security interest in all of its assets, which would be junior only to the existing $6 billion of secured debt. GM’s suggestion that taxpayers should invest $18 billion as preferred stock, junior to the existing claims of retirees, suppliers and bondholders, is ridiculous.

— The GM plan envisions no significant wage concessions from the UAW, although the UAW appears ready to negotiate, assuming all other creditors come to the table and make concessions

— Under the GM plan “full labor competitiveness” is inexplicably delayed until 2012

— The GM plan is based on an unrealistic hockey stick sales projection, assuming 16 million unit sales units in 2012 , disingenuously characterized as “more typical” than lower annual sales units in the 14 million range.

— The GM plan is more focused on what it calls “liquidity” rather that profitability, and taxpayers have been denied access to detailed profit projections prepared according to generally accepted accounting principles.

— Labor and bondholders should not be expected to support GM’s current plan which in 2012 leaves GM still unprofitable, still insolvent, and still unable to issue investment grade debt

GM Opposes an Expedited Chapter 11 reorganization

GM opposes chapter 11 reorganization for five reasons: too much delay, too many stakeholders, high administrative costs, possible lack of chapter 11 (DIP) funding, and lost sales because of the stigma attached to chapter 11.

— Delay. A pre-negotiated chapter 11 reorganization can be completed before March 31, 2009, the date GM envisions for completing its partial out of court restructuring. Specific provisions of the Bankruptcy Code authorize expedited procedures for voting on and approval of a chapter 11 reorganization plan. By assigning multiple judges to handle different aspects of a GM reorganization case, I believe GM could get approval of its plan in 100 days.

— Too many stakeholders. In chapter 11 the vote of the majority of a class of creditors binds the minority if the majority holds at least 2/3rds of the total claims in the class. For example, assuming GM has $40 billion of short and long term debt which is placed in one class, holders of $26.8 billion of the debt can bind the minority as long as those holders also constitute a majority of the bondholders actually voting on the plan.

Because GM’s bonds are likely to be concentrated in the hands of distressed debt investors, holdouts are not likely to be able to block approval of a reorganization plan. Voting in a chapter 11 case will be expedited. Outside of bankruptcy the problem caused by bondholders who do not cooperate with GM will be greater because GM has no way to force dissenting bondholders to accept its restructuring plan.

— Administrative costs. The legal and accounting work needed to do an out of court restructuring and a bond exchange offer is similar in cost to what is incurred in a chapter 11 case. However, chapter 11 gives the debtor the right to initiate proceedings to reject collective bargaining agreements or to reduce retiree benefits, and the cost of those proceedings would be higher because those legal rights only exist in chapter 11.

If GM can negotiate concessions from the UAW without the threat of a court approved rejection of the labor agreements, and get all other creditor groups to make meaningful concessions, then an out-of-court restructuring may work. Any increase in administrative costs of chapter 11 reorganization will be offset by the fact that once GM is in chapter 11 it does not have to use cash to pay dealer termination claims or other unsecured claims.

— Possible lack of funding. Elsewhere we have suggested that the government guarantee a DIP loan to GM made by a consortium of lenders with experience lending to and monitoring chapter 11 debtors. In chapter 11 GM will be able to conserve cash payments it otherwise would have to make to bondholders, suppliers, the UAW and retirees. In addition, the bankruptcy court can give “super-priority” to any government loan, which would make the loan junior only to GM’s existing $6 billion secured debt.

This is better taxpayer protection than the vague “senior status” proposed by GM. GM needs government financing, whether in or out of bankruptcy, so this risk is essentially identical and is not a reason to avoid chapter 11.

–Stigma attached to chapter 11. After GM’s plan is fully implemented GM is still insolvent by at least $30 billion, hardly reassuring to car buyers. GM could complete its chapter 11 reorganization in 100 days and come out of chapter 11 with a totally restructured balance sheet that really would reassure customers. GM’s current plan to viability is not reassuring to consumers because it does not return GM to profitability.

Deleveraging GM’s balance sheet.

GM proposes to reduce its debt from $62 billion to $30 billion, a reduction of only $30 billion, which leaves GM insolvent (negative book equity) by at least $30 billion. GM proposes that there be no reduction of the $28 billion of debt owed to suppliers, and has missed an opportunity to further reduce its bondholder debt. GM should disclose to taxpayers the amounts owed to each supplier so that taxpayers can make their own judgment about who deserves to be paid.

GM also needs to disclose the names of its 100 largest bondholders. No doubt that the UAW will insist on receiving this information and demand that suppliers make concessions and bondholders make more concessions before the UAW even considers temporary wage reductions.

If GM is going to make payments to truly critical suppliers, it should at least insist that suppliers extend new trade credit to GM in the same amount as any payments made on the old claims.

GM’s bond debt of $40 billion needs to be completely converted to equity and GM needs to announce that it is ceasing interest payments on the debt, acknowledging that taxpayers should not be asked to fund interest payments. GM needs to convert $14 billion of supplier claims to equity. By further reducing existing unsecured claims and debt GM can create a balance sheet in which it is solvent.

Lack of taxpayer protection outside of a chapter 11 case

GM proposes to give taxpayer loans “senior status”, which raises the question: senior to what? Taxpayers need a security interest in all of GM’s assets, not an amorphous senior status. Making taxpayer loans immediately “callable” if plan benchmarks are not met is meaningless because GM wants $10 billion in the next 3 months, well before GM’s suggested deadline of March 31 , 2009 for obtaining concessions from bondholders, the UAW and retirees. Once the taxpayer loans are made the other parties have no incentive to make concessions.

In chapter 11 bondholders have huge incentives to act quickly to support and expedite a GM reorganization. Obviously, to de-leverage its balance sheet (i.e. to reduce its debt) GM is going to have to convert debt into equity, most likely common shares. Because the new common shares will have a value based on GM’s restructured balance sheet, distressed debt investors will support a debt conversion that enhances the future going concern value of GM. Converting debt to equity in a chapter 11 case is an efficient way for distressed debt investors to convert their debt holdings into cash by selling the common stock they are likely to receive under GM’s chapter 11 plan.

A 100-day plan for a GM chapter 11 reorganization.

December 16,2008 GM presents its detailed financial projections to bondholders, suppliers, the UAW and the retiree trust. Bondholders and suppliers form a joint committee of creditors holding the 20 largest claims and the committee engages legal counsel and restructuring advisors to assist the committee in negotiating with GM. The UAW and the trustee representatives of the retiree trust form their own committee and retain advisors. GM begins daily meeting with the Committees and shares financial information, projections and other data needed by the Committees to represent their constituents

January 2, 2009 Congress announces agreement in principle to guarantee a $20 billion secured DIP loan to GM, subject to stringent conditions and the written agreement of the two Committees to support GM’s revised restructuring plan.

January 5 Treasury/Commerce Department convenes a meeting of the Committees and of creditors, and GM presents detailed term sheets for an expedited restructuring in chapter 11.

January 15 Treasury completes drafts of financing documents for GM to be implemented in GM’s chapter 11 reorganization, subject to review by GM and the Committees.

January 25 After receiving comments, the secured DIP financing arrangements for GM are fully documented, subject to the consent of the two Committees and the existing secured creditor.

January 31 Committees complete negotiations on the detailed term sheets to be implemented in a chapter 11 reorganization. Individual committee members agree in writing to support the plan after it is filed.

February 5 GM files its pre-negotiated chapter 11 case, including a detailed plan of reorganization and a disclosure statement which will include financial projections.

The first draw of $5 billion on the DIP loan is approved on Day 1. The two Committees are approved as the official committees in GM’s chapter 11 reorganization.

On Day 1 The arrangements needed to guarantee or pay customer warranty claims in the ordinary course of business are presented to the court and approved. The DIP loan has a specific carve out of $2 billion to permit immediate use of taxpayer money for payment of consumer warranty claims. GM agrees to honor all warranty claims and the court orders GM to honor warranty claims. GM and the Committees release a schedule showing the timeline for completion of the chapter 11 case no later than March 31, 2009

February 15 Court approves the GM documents needed to solicit votes on the plan from bondholders, trade creditors/suppliers, the UAW and the retiree trust. The plan incorporates any UAW concessions and any changes in payments to the retiree trust. The two Committees and each committee member agree to vote for the plan and recommend the plan to other creditors.

February 17 Court approves the balance ($15 billion) of DIP financing, and preliminary approval of an additional $20 billion line of credit for post-chapter 11 financing.

The provisions for continued government financing of GM are also included in the plan and will be implemented once the plan is approved. In total, $40 billion of loans or lines of credit are available to GM.

February 28 Votes on the GM plan are counted and the plan is approved.

March 10 Court hearing held to approve the GM reorganization plan.

March 26 GM reorganization plan is implemented and initial distributions begin to creditors holding undisputed claims. GM distributes warrants to the US Treasury as compensation for making the DIP loan and extending the line of credit.

After the plan is implemented the court will retain jurisdiction to rule on disputed claims, including any dealer termination claims, as well as retain the authority to decide a host of other matters and disputes. Because the plan will have a reserve that takes into account disputed claims, distributions to creditors will be made in one or more distributions as disputed claims are resolved.

By using expedited chapter 11 procedures GM can bind all stakeholders, including holdouts that object to the plan, holdout for preferential treatment, or do not bother to vote. GM can come out of chapter 11 as a solvent company, a far better result than what is proposed under GM’s current plan. Jobs at a properly restructured GM will be secure jobs. Government funding of GM will be better protected in chapter 11, and the refinancing of government loans is more likely if GM is solvent and truly viable in the long term.