General Motors' High-Wire Bankruptcy Act

On the eve of a deadline to submit their viability plans to the U.S. Treasury, General Motors (GM) and Chrysler executives continued scrambling on Feb. 16 to cut a deal that would restructure both labor costs and debt. If the companies don't show that they are viable in the long run, the government could refuse to give either one additional money. Without help from the government, Chapter 11 bankruptcy is a real option.

But getting all sides to agree is tough. GM said in December that it wants its bondholders to take 30&cent on the dollar for their GM debt and receive stock to make up for the rest. GM also wants to give a United Auto Workers-led trust fund half the value of $21 billion in obligations in cash and the rest in stock. Both the union and a committee of GM bondholders want the other creditor to make big concessions. "It will be a face off between the union and bondholders with GM in the middle," says David E. Cole, chairman of the Center for Automotive Research in Ann Arbor, Mich.

Bondholders are unhappy that they are being offered 30% on their bonds while the union is being offered 50% on its debt. The UAW is wary of taking too steep a cut on the cash portion of the so-called VEBA, or Voluntary Employee Benefits Association Trust. The trust fund is supposed to be set up next year with $36 billion in GM cash and bonds to pay for retiree healthcare for some 80 years. But with GM short of cash, the company can't afford to fund the trust. So the company wants the UAW to take $10 billion in cash and the rest in equity for the remaining $20 billion the company owes.

Federal task force needs time, too

To satisfy Treasury Secretary Timothy Geithner and Lawrence Summers, one of President Barack Obama's chief economic advisors, GM will have to placate both the UAW and the bondholders. Officially, GM has said only that it is talking to all parties.

Privately, GM executives say that they will probably not have everything done by the Tuesday deadline. That may be just fine. The new task force—which is headed by Geithner and Summers but includes members from such other departments as Commerce, Energy, Transportation, Labor, and the Environmental Protection Agency—will probably not make a final decision on funding this week.

If they don't think the automakers' plans go far enough, the task force could ask all parties to get back to negotiating a deal that restructures GM and Chrysler. Thus the Feb. 17 deadline is more likely to start the process of restructuring the two companies. "I highly doubt that the President set up a task force to vote up or down this week," says Rep. Thaddeus McCotter (R-Mich). "This is a first important step in what will be the start of the process between all stakeholders."

Do Bondholders Lack Leverage?

Meanwhile, sources say that GM has looked at the possibility of a bankruptcy filing. But executives say that the company still views that as a last-ditch move. The prospect could also be used as leverage with bondholders, some of whom want to hold out for a better deal than GM has offered. Ultimately, Cole says, "the bondholders are going to have to play."

It's easy to see why. GM had somewhere around $12 billion in cash before borrowing $9.4 billion from the government. Even if the company still had the $21.4 billion in cash, unsecured creditors stand behind $11.8 billion in secured debt and the government loans. Plus a bankruptcy judge would order the company to pay suppliers first. That could leave bondholders begging in bankruptcy.

But do they believe that GM will go bankrupt? The government will want to avoid that, says IHS Global Insight analyst Aaron Bragman. It would cost more than $100 billion to put workers on unemployment benefits and draw on other social programs should GM fail, says Bragman. The bondholders know this and may use it as bargaining power to ask for more than 30 cents on the dollar. "It may simply be a tactic to try to get the UAW and the company's bondholders back to the negotiating table, Bragman says.

To get a deal done, GM and Treasury officials will have to convince the bondholders that the threat of Chapter 11 is real.

With David Kiley in Detroit

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