What Could Possibly Go Wrong Now?

by Edward Niedermeyer

Published: December 19th, 2008

With $17.4b pledged to GM and Chrysler, and the Canadian “plus one” on the way (er, “plus several billion,” actually), the dark days of Carpocamageddon are all but over, right? Of course not. As several of the B&B point out in comments on the bailout announcement, GMAC is a giant question mark hanging over the entire situation. The former GM captive lender is headed for a massive GDIF (God Damn, It’s Friday) moment today unless about $5b of healthy capital lands on its lap… within hours. The AP reports that GMAC admits that it has no way of extending or sweetening the deal, implying that bankruptcy is an inevitability. And here’s the kicker: according to Brian Johnson of Barclays Capital, if GMAC were to fail, GM could need an additional $9 billion to $13 billion in funding to supply financing to its dealers. And GM only gets $9.4b from the bailout until February. One step forward and two steps back? Actually, the real bad news which the bailout does nothing to stop comes from GM bondholders. And their newly hired legal help.

According to Debtwire (via The Financial Times), 12-20 large GM bond holders, including asset management giant PIMCO heard pitches from potential advisors at a meeting this week. Several sources report that this committee has hired Paul Weiss as legal counsel and is leaning toward Houlihan Lokey as a financial advisor. And they’re gearing up for a fight, thanks to what bondholders see as unrealistic aspects of GMs recovery plan. To whit: “The baseline scenario in the restructuring strategy GM submitted to Congress on 2 December, forecasts a pro forma EBITDA in 2012 to be USD 15.3bn, with a downside scenario of USD 12.1bn, according to a public version of the plan. But that figure should be closer to USD 10bn of EBITDA while the reworked capital structure should be based around USD 8bn of EBITDA to provide for a cushion should conditions worsen, said one of the sources. Bond holders have nothing to gain from swapping for equity in an unsustainable capital structure, he said.”

So if the initial $9.4 swirls into the abyss left by a GMAC bankruptcy, and bondholders resist a quick-and-dirty cramdown (now that it’s not a condition of federal aid) you’ve got trouble in River City. Again. Still. Etcetera. And then there’s always the possibility of more bad news from Delphi. By the way, does anyone have a subscription to Delphi Bankruptcy News, now celebrating 153 depressing issues? Ultimately, this bridge loan does nothing to address the underlying problems, and provides no real incentive for reform. And what we’re learning about a possible bondholder revolt proves that everyone is already treating GM as if its bankrupt. What a time to put taxpayers on the hook.

Edward Niedermeyer

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Ihatetrees on Dec 20, 2008
bluecon: There is also the matter of a secret ballot vote on whether one should join a union. That will have to end. The debate over Card-Check will be epic. I have no idea what way it'll go - but there's hope. Never underestimate the Senate's Darth Vader, Mitch McConnell. Or the potential disfunction of Democrats in power when confronted with tough choices...

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Pch101 on Dec 20, 2008
Can anyone translate what on earth is going on here? Short version -- GMAC is trying to put the squeeze on the ResCap investors, using the threat of being able to crush the value of their positions in order to get them to play ball. If those investors take the deal, then there should be enough money to put GMAC Bank into the federal funds system, in which case GMAC won't need the GMAC bondholders like PIMCO to agree to anything. GM obviously has some smart guys in the finance department. It's a shame that they don't have that kind of talent for building cars.

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