GM's Fate in Bondholders' Hands After UAW Deal Struck
The United Auto Workers struck a deal with General Motors and the federal government Thursday to cut labor costs, close factories and change the way retiree health care is funded.
The agreement could ease one of GM’s biggest problems: The cost of its work force. But the automaker is still struggling with a crushing debt that may drive it into a Chapter 11 bankruptcy reorganization.
The deal is “the best news for everybody involved,” said Harlan Platt, a professor at Northeastern University in Boston who teaches corporate turnarounds.
“This is great for the workers because some of their jobs will be there in the future. This is great news for the Obama administration because they’ve demonstrated they’re respecting contracts.”
General Motors Corp., which has received $15.4 billion in federal loans, faces a government-imposed June 1 deadline to finish a major restructuring or be forced into bankruptcy protection.
The government has told the automaker to cut labor costs, close factories, shed dealers and brands, and persuade at least 90 percent of its bondholders to sign on for the stock-for-debt exchange.
But thousands of bondholders are expected to shun the company’s offer to take 10 percent of its stock to wipe out $27 billion in unsecured debt.
Harlan Platt, a professor at Northeastern University in Boston who teaches corporate turnarounds, said the UAW deal could be the catalyst for more bondholders to accept GM’s offer.
GM shares rose more than 32 percent to $1.92 on Thursday — an increase that Platt says indicates that investors see value in the company. Platt believes the stock could climb to around $4 because GM will be able to restructure out of court, emerging with far less debt, lower costs, fewer brands and factories, and a rejuvenated vehicle lineup.
GM has offered bondholders 225 shares for every $1,000 of debt.
“If you’re getting 225 per $1,000 and the stock goes to $4, which I think it will, you’re getting all your money back,” he said. “This is going to be significantly more than they will get in a bankruptcy.”
But Douglas Baird, a University of Chicago law professor who specializes in bankruptcy cases, said the bondholder obstacle is nearly insurmountable.
“There’s a collective action problem,” he said. “There are a lot of these bondholders. Even if there are a lot of them on board, that’s not the same as 90 percent on board.”
Still, the UAW deal could help shorten the length of time GM stays in bankruptcy protection, Baird said, making it easier for the court to concentrate on remaining matters such as the bond debt.
The UAW was withholding details about the agreement until plant-level union officials were briefed. The union summoned local officials to Detroit on Tuesday for the explanation, and local union leaders expected voting by the membership to end late next week.
The UAW statement announcing the deal did not mention factory closures or production of vehicles outside the U.S. — issues that the union has protested in Detroit and Washington. But a person briefed on the agreement said it includes an agreement on the factories. The person requested anonymity because union members have not been briefed.
GM had planned to close 16 factories, laying off 21,000 hourly workers. Of the 16 facilities, two have been announced previously: an engine plant in Massena, N.Y., and a parts stamping plant near Grand Rapids, Mich.
On Thursday, union leaders at the company’s Spring Hill, Tenn., assembly plant warned 2,400 hourly workers in an e-mail that they believe the factory will be closed by the end of this year.
The company has said it will also offer more buyout and early retirement packages. GM has about 61,000 hourly workers in the U.S. but plans to take that number down to 40,000 by 2010.
The Obama administration welcomed the agreement, saying it is a positive development in GM’s “effort to restructure and become a strong, viable company going forward.”
The deal apparently came after two days of talks in Washington involving UAW President Ron Gettelfinger and new GM CEO Fritz Henderson. The men began meeting after appearing together at a White House news conference Tuesday where President Barack Obama announced higher fuel economy standards.
UAW officials have said the union’s agreement with Chrysler reached last month would serve as a template for any deal with GM, but some differences had to be worked out.
At Chrysler, the UAW agreed to take 55 percent of the company’s stock in exchange for roughly $6 billion of the $10.6 billion that Chrysler owes its retiree health care trust.
GM has said it was negotiating to give the UAW about 39 percent of its stock in exchange for half of the $20 billion the company must pay into the trust. Half of GM’s stock would go to the government, with 10 percent going to bondholders. The remaining 1 percent would go to current shareholders.
Bondholders have resisted the 10 percent offer, complaining that they are getting too little for the money they are owed. The offer expires Tuesday but could be extended.
Willa Woodard, a retired postmaster from Georgetown, Texas, bought $170,000 worth of GM bonds with her husband but said they now “stand to lose it all.” The dividends would help them pay taxes, insurance and medical costs and for the “occasional road trip to see our grandchildren.”
“As modest as this amount may sound to some, it is our safety net,” Woodard said. The couple recently took part-time jobs. “We’ve always worked hard and played by the rules, so it’s difficult for us to understand why as GM bondholders we are being treated so unfairly,” Woodard said at a Washington news conference.
A spokesman for a committee of GM’s bondholders had no immediate comment on the union agreement.
If its bond exchange offer goes through, GM plans to issue 62 billion new shares and then do a 1-for-100 reverse stock split. The whole deal would severely cut the value of GM’s existing shares.
Also under the Chrysler deal, workers will no longer get most of their pay if they are laid off and placed in the controversial “jobs bank.” Instead, they will get 65 to 70 percent of their base pay to supplement state unemployment benefits. The length of time they are paid varies by seniority.
Cost-of-living pay raises were suspended through 2011, and a provision for binding arbitration would prevent the union from striking through 2015. Performance and Christmas bonuses will be suspended this year and next to help pay health care costs.
Ford Motor Co., which is not receiving government support, agreed in February to a revised contract with fewer concessions than Chrysler. But the company has said it does not want to be at a disadvantage to its Detroit competitors, so it may eventually reopen negotiations with the union.
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Associated Press writers Dan Strumpf in New York, Bill Poovey in Chattanooga, Tenn., and Ken Thomas and Jeannine Aversa in Washington contributed to this report.
5/21/2009 6:33 PM TOM KRISHER AP Auto Writer DETROIT