General Motors (GM) is in a real catch-22. The company has a credible plan to get government funding and transform the company. The company's plan has won backing to get a loan that will save it from bankruptcy and transform the company. The problem is that the fastest way to make some of those transformational changes would be a bankruptcy filing that could also ruin it.
For GM to really compete, the company needs to greatly reduce its debt burden (BusinessWeek.com, 11/25/08) and long-term health-care costs. Together, interest payments and retiree medical costs add up to roughly $8 billion a year in cash. Interest from $18 billion in government loans will be another $900 million a year.
Bankruptcy Risks and Rewards
In a bankruptcy, GM could force the union and its retirees to accept less expensive health-care plans, which would slash its $47 billion long-term medical liability. The company could also make creditors take a hit. In court, GM could drop its debt burden of $63 billion, the total including new government financing, by half or maybe less.
Outside of bankruptcy, it all has to be negotiated. It's no slam dunk that creditors will take a deep discount on their bonds and accept equity in the company. "Unless you have the power of the bankruptcy court, the union and creditors don't have to give anything," says Maryann N. Keller, an independent auto analyst who is on the boards of Dollar Thrifty Automotive Group (DTG) and car dealer chain Lithia Motors (LAD).
But going into bankruptcy poses the huge risk that consumers will simply shun GM's cars. Then revenue falls so fast that even court protection won't be enough. "I firmly believe that bankruptcy would be a disaster," says George M. C. Fisher, the lead director on GM's board. "You can't restructure fast enough to handle dramatic drops in market share."
Signs say that Fisher, a senior adviser at buyout firm Kohlberg Kravis Roberts, is right. Already GM has seen its sales drop at a rate of more than 40% for the last two months, which is a steeper decline than most other carmakers have endured. Says HIS Global Insight analyst John Wolkonowicz: "The bad press is already hurting sales."
That's why it will be vital that all of the parties involved put aside self-interest and take big concessions.
Fisher said in an interview that GM already is working on a plan to get creditors to take a haircut on their debt holdings. In the GM's plan filed with Congress on Dec. 2, the company calls for reducing its total debt and long-term liabilities from $63 billion to $30 billion. That's essential to reducing further calls on its cash and reducing the annual $3 billion GM currently pays in interest.
GM wants to convert some of that debt to equity, which forces bondholders to gamble on a GM recovery by taking stock. But even Fisher, who calls himself an optimist, says it won't be easy to do. "That is a big job and has yet to be done," he said. "There's no silver bullet. It will be a lot of work."
But creditors may prefer to hold their bonds and gamble that they will do better than taking stock. Or they could even see if they can get a better deal in bankruptcy court. Very little of GM's debt is secured, so unsecured creditors will have a real voice in bankruptcy proceedings, says Keller.
Getting the union to budge might be easier. United Auto Workers' President Ron Gettelfinger said on Dec. 3 that the union is willing to make other concessions. Health care may have to be one of them, but Gettelfinger declines to say what GM and the union will be negotiating.
Last year, the UAW agreed to take over medical benefits in 2010 (BusinessWeek.com, 9/26/07). GM and the other automakers will give the union enough cash to cover 68% of the liability, which in GM's case is $32 billion. That will start an independent Voluntary Employee Benefits Assn., or VEBA, which the union will use to cover medical plans for the workers.
GM has already set aside a big chunk of the money, but has to give $7 billion in early 2010. Gettelfinger says he will let GM, Ford Motor (F), and Chrysler defer those payments. But they are still going to come due.
One solution is for union workers to accept a weaker health-care plan. Right now, UAW workers and retirees have a great plan. They pay in premiums and co-pays about 5% of their annual medical costs, according to the Center for Automotive Research in Ann Arbor, Mich. GM picks up the rest. Union workers in other industries pay about 30% of their costs.
If the UAW accepted a greater share of the costs, GM's long-term liability (that $47 billion) would shrink. As a result, GM, Ford, and Chrysler would be required to put less money into the VEBA trusts. It would work the same way as reducing long-term debt payments.
But the UAW has to play ball. But the UAW has to play ball. Gettelfinger didn't say he would make bigger health-care concessions. But he indicated a willingness to alter the UAW's contract one government financing is in place.
To really make GM competitive, the union may have to consider some bigger moves than it has already made. Fisher says the union appears game. "I don't intend to be an apologist for the union, but in the past couple of years the union has worked pretty well with management," Fisher said. "The world has changed. Now we and they have to make sacrifices. Everything is on the table."
A Bridge to Solvency
Fisher also said that even if there is a bridge loan from Congress, the UAW, GM, and other constituents may have to revisit the plan to keep the company's cash position moving toward break-even should the car market turn even more sour.
One thing is certain: GM needs a bridge loan that gets the company at least into late January when the new Administration gets into the White House. President-elect Barack Obama has said he wants to help Detroit, and there is a widespread feeling among members of both parties that the issue should wait until he assumes office. That would give Congress time to draft a response more thoughtful than what would come out of a rushed, lame-duck session. Says Senator Charles E. Schumer (D-N.Y.): "Let's get a small amount of money needed for transition to get the companies into the New Year, and then we can build a structure of oversight over the larger necessary package."
It appears likely that Congress will give GM and Chrysler enough money to make it until the inauguration. Congress cut a deal on Dec. 5 that will use $18 billion in Energy Dept. money to bridge GM and Chrysler until the new President takes office and develops a longer-term plan.
If approved by Congress, the funding would give Obama and the new Congress time to craft a way to oversee the automakers and how they use the loan money. They can also use the second round of government financing as a carrot to get the companies, union, and creditors to formulate a deeper plan that can make each company more competitive.
There's already talk that the longer-term plan could include merging Chrysler into GM. Cerberus Capital Management, Chrysler's owner, would love to get rid of the company. Fisher says GM won't even entertain the thought until it gets through the current cash crisis. But perhaps under the new Administration and when things stabilize, he said, GM would give a Chrysler acquisition a second look.
For now, Congress has to approve loans with a vote next week or GM heads into bankruptcy. GM doesn't have a plan B to get the company into next year. "If we don't get help immediately," Fisher says, "there won't be much left for the Obama Administration to work with."