GM Restructures Debt to Avoid Bankruptcy

Special to The Auto Channel
SeekingAlpha
by: Wall Street Strategies
April 29, 2009

The General Motors (GM) saga continued on the morning of April 27, with CEO Fritz Henderson announcing an offer to convert more than $27 billion of debt into equity. GM said it would give current bondholders 225 shares for every $1,000 of debt held, which equates to approximately $0.40 on the dollar. The Company is hoping that it can convert more than an additional $20 billion of debt from the Treasury and UAW ($10 billion each).

Under the restructuring, the U.S. Treasury would extend an additional $11.6 billion of loans to GM, in addition to the $15.4 billion in existing loans. In exchange for the equity in a restructured GM, the government would forgive half the debt. Furthermore, the Company would issue $10 billion in stock to the UAW to fund its VEBA account (instead of the $20.4 billion worth of cash).

The exchange for the current bondholders will commence only if 90% agree to the terms. Under the plan, if GM fails to get adequate participation, it will file for bankruptcy protection.

In addition to the debt conversion, GM announced that it is phasing out its Pontiac brand, closing 13 more plants, and reducing its dealer count by more than 42% to 3,605 by the end of 2010, compared to the 6,246 that are currently open in the United States. GM also announced it would shut almost 300 dealerships in Canada.

This is a further reduction of 500 dealers and is four years sooner than the February 17 Plan. The job cuts go deeper than previously announced, and more hourly (and salaried) workers will be slashed. The hourly job cuts will reduce GM's U.S. work force by 7,000 more workers than those outlined in the February viability plan, to 40,000 from 61,000 by 2010.

All in all, the plan needs 90% of bondholders to accept the deal, and if the Company doesn't achieve this, the rest of the plan is a moot point. We believe that General Motors will file for Chapter 11 bankruptcy before the June 1 viability deadline imposed by the auto task force. Mr. Henderson basically drew a line in the sand for his bondholders to either accept the deal or the Company will go bankrupt.

It is disheartening that, even on the brink of bankruptcy, the government is willing to give $11.4 billion more of the tax payers' money to help prop up a sinking ship.

My extremely optimistic view is that by this time next year (if everything goes right for the Company, which is doubtful) GM will emerge from bankruptcy with four core brands (Chevrolet, Cadillac, GMC, and Buick). If the economy doesn't begin to rebound by the end of 2009 or if the dealerships, which are expected to be closed, put up a big fight, then that June 2010 emergence from bankruptcy could be pushed back even further.

Hopefully, all the foundations and plans the administration and management have been making will help to speed up the filing, but if past history has been any indication of future performance, 2011 is the more likely the timeframe that the Company will re-emerge from bankruptcy.

Written by David Silver, a Research Analyst for Wall Street Strategies www.wstreet.com covering companies in the Transports, Autos, and Beverage sectors.