Oct. 15 (Bloomberg) -- General Motors Corp., the largest U.S. automaker, said its United Auto Workers contract will reduce retiree health-care obligations by $47 billion and cut hourly labor costs for new union employees in half.

The accord creates a fund run by the union that will be responsible for 73 percent of GM's $64 billion in liability for retiree medical care. Detroit-based GM said in a filing today that it will contribute about $32 billion to start the fund.

The savings are part of Chief Executive Officer Rick Wagoner's effort to close a $25 to $30 gap in hourly labor costs with the U.S. manufacturing operations of Toyota Motor Corp. and Honda Motor Co. Bonds rose and shares fell after GM's disclosure of details of the contract.

``The deal matches the hype in terms of what we were expecting to see,'' Morgan Keegan & Co. fixed-income analyst Pete Hastings said in an interview from Memphis, Tennessee. ``This is good news.''

GM's 8.375 percent note due July 2033 climbed 1.44 cents to 94.19 cents on the dollar, according to Trace, the NASD's bond- price reporting service. The yield decreased to 8.95 percent, the lowest since March, according to Trace.

Shares Decline

GM fell $1.53, or 3.6 percent, to $41.11 at 4:01 p.m. in New York Stock Exchange composite trading. The drop was the biggest among the 30 stocks in the Dow Jones Industrial Average. GM still has the index's second-largest 2007 gain, at 34 percent, as investors bet that Wagoner can return the automaker to profit after losing $12.4 billion in 2005 and 2006.

Standard & Poor's kept GM's debt on credit watch with a positive outlook, meaning the ratings company may raise the automaker from the current B, five steps below investment grade. S&P said it plans to decide by the end of this month.

``We view the new contract as favorable to GM compared with past agreements and believe the contract will support GM's turnaround plan in North America,'' S&P ratings analyst Robert Schulz said in a report today. ``However, the benefits from implementation will not occur until around early 2010.''

Credit-default swaps on GM debt were unchanged at 405 basis points, according to CMA Datavision. The price means it costs $405,000 to protect $10 million in bonds for five years.

A decline signals rising investor confidence in the company's ability to pay back its debt.

Competitive Boost

The automaker's competitive position will get a ``significant'' boost from the four-year contract, letting GM move from ``stabilizing U.S. sales to profitably growing them,'' Wagoner said on a conference call with analysts and investors.

The agreement will drain about $3.3 billion from GM cash next year and $700 million in 2009 before adding $2.8 billion in 2010 and $3.3 billion in 2011, Chief Financial Officer Fritz Henderson said on the call. New workers will earn $25.65 an hour in wages and benefits, compared with about $78.21 for all costs now, or about $60 without retiree costs, GM said.

Lehman Brothers analyst Brian Johnson in Chicago said GM's $47 billion benefit from moving retiree obligations off its books was in line with what he expected. GM's cash contribution was slightly higher than he estimated, Johnson wrote in a report today. GM's disclosure was required within four business days of the Oct. 10 contract ratification.

Over the life of the new accord, hourly base wages will start at $14 and rise to $15.30 for new hires such as forklift drivers and others not directly involved in making vehicles or parts. That compares with $28.12 for current employees, whose pay won't be cut.

`Cost Gap'

``The agreement enables appropriate employment levels and introduces wage and benefit structures that support efforts to close the manufacturing cost gap here in the U.S.,'' Wagoner said on the call.

The ``non-core'' category of lower-paid employees eventually will cover more than 16,000 workers, not including jobs such as janitors for which the automaker will use outside contractors, Henderson said.

As many as 56,000 of GM's 74,500 workers will be eligible for full or early retirement in 2011, Henderson said. Those employees would be replaced as they leave by workers earning lower pay and benefits.

GM said its U.S. hourly labor costs will fall to $10.1 billion this year from $12.6 billion in 2006 and decline ``significantly'' from 2008-2011 without giving an estimate.

VEBA Contribution

For the new health fund, known as a Voluntary Employee Beneficiary Association, or VEBA, GM will contribute an initial payment of about $16 billion from an existing medical fund and $2.5 billion in cash, plus another $5.6 billion over time.

The automaker will pass through $1.7 billion diverted from its overfunded pension, a $4.4 billion convertible bond and other payments, offset by money from a previous agreement, to reach $31.9 billion.

GM said in July it had $27.2 billion in cash, marketable securities and funds available from a retiree health-care fund as of June 30, an increase from $24.7 billion in March. That doesn't include about $5.4 billion GM may gain from the August sale of the Allison transmission unit.

The automaker also modified the so-called jobs bank that pays union workers when jobs aren't available in a manufacturing plant.

The protection now is capped at two years, and employees lose pay and benefits after they refuse reassignment to a new job. If the new job is within 50 miles of their old one, they can refuse once. If it's farther, they can refuse four offers. Workers previously had no time limit on the payments or penalties for refusing a job.

Product Pledges

GM and the UAW reached the landmark contract on Sept. 26 after a two-day strike. GM said today it made specific pledges of future products at 14 assembly plants and 25 other stamping and powertrain plants with additional business dependent on market conditions.

To save as many jobs as possible, the UAW is bending on two core principles: its 53-year insistence that employers bear sole responsibility for health care and opposition to multiple wage tiers, which the union had fought since its inception in 1935.

Wagoner previously reached agreements with the UAW to close 12 North American locations and persuaded 34,400 union workers to retire or leave early, steps that he estimated will cut $9 billion from U.S. costs this year.

The union said the average worker will gain $13,056 over the life of the agreement, based on a 2,080-hour year and 10 percent overtime. That includes a $3,000 bonus in the first year, followed by bonuses of 3 percent, 4 percent and 3 percent in later years. An assembly worker's hourly rate will rise to $28.85 at the end of the fourth year from $28.12.

The contract replaces a four-year agreement that expired Sept. 14. The UAW said 66 percent of production workers and 64 percent of skilled-trades employees voted for the accord.

Chrysler LLC, the third largest U.S.-based automaker, and the UAW approved a similar, tentative agreement last week that still must be ratified by Chrysler UAW members. The UAW will now seek an agreement with Ford Motor Co., the No. 2 U.S.-based automaker.

To contact the reporter on this story: Jeff Green in Southfield, Michigan, at jgreen16@bloomberg.net

Last Updated: October 15, 2007 16:07 EDT