After reading through GM’s restructuring plan, it strikes me that the $18 billion loan from the government is only the beginning of the money that GM is asking for. Take a look at page 11:
includes, and is conditioned upon, significant sacrifice and deleveraging of GM’s balance
GM will immediately engage current lenders, bond holders, and its
unions to satisfactorily negotiate the changes necessary to achieve this capital structure.
And what does GM’s balance sheet look like after all this sacrifice and engagement? Total debt has been magically reduced from $62 billion to $30 billion. In other words, the government might provide $18 billion in new money, but GM’s creditors are going to be asked to provide $32 billion in debt relief.
I spoke this afternoon
to Troy Clarke, the head of GM’s North America business, and he said that roughly half of the renegotiated debt would come in the form of lower contributions to the trusts run on behalf of GM workers by the UAW — the so-called VEBA contributions. But yes, the other half of the debt restructuring would involve bondholders.
Which means that GM is going to ask bondholders to voluntarily give up $16 billion of future income as part of this plan, and it’s not going to have a bankruptcy court giving it any muscle to help it do so. Is this even possible? Clarke’s not a financial expert, and couldn’t give me much in the way of detail on whether GM’s bonds have any provisions which might facilitate a bond restructuring outside bankruptcy. I’m hoping to hear back from someone else within GM on this subject. But Clarke did say that the bond restructuring was "a necessary and critical element of the plan", and that he would be fine with the government making its own aid conditional on such a restructuring going through.
In fact, the plan is in many ways a fill-in-the-blanks document — something Congress can pick up and run with, rather than simply approve. It doesn’t suggest an interest rate for the government’s loans, or suggest how much government aid could come in the form of preferred stock. It clearly sees a government role in terms of bullying bondholders into giving up that to which they are contractually entitled, however: "Oversight Board involvement may be necessary to be successful," is the way GM puts it. What bondholders will think of this, and whether they will have any ability to hold out and free-ride on everybody else, remains to be seen.
Clarke did reiterate to me, unsurprisingly, the "bankruptcy is not an option" mantra, saying that a large part of the reason for the fact that GM’s sales fell more than those of the auto industry as a whole last month was that would-be buyers were put off by even the possibility of bankruptcy. Is that true? Probably. Is it surmountable, especially with a government guarantee on GM’s warranties? Yes, I think so. It’s got to be no harder than restructuring bonds outside bankruptcy while retaining some stake for shareholders, in any case.