Tuesday, May 26, 2009

U.S. Treasury to Own 70% of Restructured GM; Provide $50 Billion of Additional Financing

We The People will now own the three largest insurers in the world (FNM, FRE, AIG) and the second largest automaker (GM) all while retaining de facto control of the 19 largest banks in the US. We also are the lender of first resort on virtually any asset that isn't pretty damned secure. Quite a remarkable turn of events these past 12 months or so.

Don't worry though, it's not socialism. It's just government directed capitalism, minus the private capital, minus the consequences, and with a strict authoritarian, tops down regulatory structure around winning and losing.

BTW, watch out if you're a healthcare company...just wait until one of these big ones gives Treasie Mae the opening it's looking for....

Per the NY Times:
- Treasury will provide an additional $50 billion in financing (on top of the $19.5 billion they’ve already received)
- UAW’s VEBA will get 17.5% minimum, another 2.5% in warrants and a $2.5 billion note
- Bondholders get 9% (ouch!)
- Existing shareholders get 1% (why on Earth?)

This whole thing is so fascinating(ly horrible). In the Chrysler deal, the Treasury gets 10%. In this deal, they get 70%. I’m guess Nissan/Renault or Honda ends up with a chunk at some point in the not too distant future.

For the record, this one is going to be a shit ton harder to 363 in bk than Chrysler because the bondholders are so disparate. The Chrysler cramdown was made possible by TARP banks controlling a large majority of the senior secured. As luck would have it, these TARP banks willingly went along with the Treasury's "restructuring" proposal. Further, the Chrysler capital structure was fairly straightforward thanks to Cerberus's recent ownership.

GM's capital structure, on the other hand, literally looks like an M.C. Escher drawing where there seems to be no ending and no beginning.

May 27, 2009
U.S. Expected to Own 70% of Restructured G.M.


DETROIT — The government will hold a large share of General Motors after the company emerges from bankruptcy protection, and will provide G.M. with about $50 billion in financing so that it can reorganize, people with direct knowledge of the situation said Tuesday.

The Treasury Department will receive about 70 percent of the new G.M., while the United Automobile Workers union will hold 17.5 percent through its retiree health care fund. The fund also would receive warrants for an additional 2.5 percent of stock in the new G.M., with a price to be determined later, potentially giving it a total of 20 percent.

That is about half of the stock that the U.A.W.’s fund, called a Voluntary Employee Beneficiary Association, or VEBA, was expected to receive under plans drafted this spring.

The figures were outlined to union leaders in Detroit, who met Tuesday to consider a new agreement between the U.A.W. and G.M.

Bondholders will receive a 9 percent stake of the new company and existing shareholders 1 percent.

G.M., which has already received $19.4 billion in financing from Treasury, would get an additional $50 billion or slightly more in debtor-in-possession financing, which it would draw upon during its reorganization.

The Treasury plans to create a new version of G.M. with its most attractive assets, like Chevrolet, Cadillac and some of its manufacturing operations. The rest of G.M. would be sold or liquidated.

G.M. is expected to seek Chapter 11 protection on Monday, the deadline set by the Obama administration for the company’s overhaul, although the initial set of papers could be filed during the weekend, allowing for the first court hearings next week, these people said.

The $50 billion-plus figure includes $7.6 billion that G.M., which drew an additional $4 billion in federal financing on Friday, told the Treasury last week that it would need to operate after June 1.

Assuming the government’s plans come about, the Treasury would own 70 percent of G.M. and share a 10 percent stake of Chrysler with the Canadian government, once the two companies emerge from bankruptcy protection. G.M.’s shares ended at $1.44 a share on Tuesday, up a penny from Friday’s close.

G.M. is awaiting the results of an exchange offer with its bondholders, who must decide by 12:01 a.m. on Wednesday whether to exchange $27 billion in bonds.

Few bondholders are likely to accept the offer, which called for them to receive about 41 cents for each dollar in bonds. G.M. has said it would seek bankruptcy protection if it does not receive 90 percent support from bondholders, which analysts saw as a near impossibility.

Greg Martin, a G.M. spokesman, declined to predict the outcome. He said G.M. would make an announcement before the market opened on Wednesday. “If the bond exchange is unsuccessful or any of the minimum conditions are not satisfied, then G.M.’s board will meet to discuss next steps,” Mr. Martin said.

The Treasury has continued negotiations with an ad hoc group representing bondholders with about 25 percent of G.M.’s debt, and may try to reach an agreement with this group before the company seeks bankruptcy protection, the people with direct knowledge of the situation said.

G.M. owes about $20 billion to the employees’ beneficiary association, which would take responsibility for health care benefits to G.M. retirees and their spouses.

The offer to the U.A.W., outlined Tuesday, would place 17.5 percent of the stock in new G.M. in the association. The health care fund also would receive a $2.5 billion note from the new company, as well as $6.5 billion in preferred stock paying a 9 percent cash dividend, for a total of $9 billion in cash.

The union also is receiving warrants representing 2.5 percent of the stock in the new G.M., with a strike price to be determined later.

In a regulatory filing last month, G.M. said it planned to give the U.A.W. $10 billion in cash and a 39 percent stake in the company to cover its shortfall. That would have left about 51 percent of G.M. under the Treasury’s control.

But the government decided it wanted a bigger share, these people said, given the size of its investment.

Moreover, bondholders were displeased that they were offered only 10 percent of G.M. for their $27 billion in debt, while the U.A.W., whose obligation was less, was in line to get significantly more.

The changes involve “painful, unprecedented sacrifices” for union workers, U.A.W. officials told members in a summary distributed to plant leaders Tuesday.

“Faced with this dire situation and realizing failure to meet the government requirements would surely mean the end of General Motors, your bargainers painstakingly put together modifications to the collective bargaining agreement to satisfy the Treasury Auto Task Force,” the summary said. “Considering the alternatives, we urge a ‘yes’ vote in favor of ratification.”

The plant leaders who met Tuesday morning in Detroit voted unanimously to recommend that their members support the deal.

The union persuaded G.M. to reduce the number of vehicles it will import from low-wage countries like China. G.M. agreed to retool two previously closed plants in the United States so that they can stamp metal for and build as many as 160,000 compact and small cars a year. G.M. also agreed not to increase production in Mexico by reducing production of similar vehicles in the United States.

Three assembly plants and one stamping plant would be put on “standby,” to be reactivated if market demand increases beyond current projections.

Nearly all of G.M.’s hourly workers will receive another buyout and early retirement offer. Production workers eligible to retire would receive $20,000 and a $25,000 discount voucher toward a new vehicle, which is similar to the terms that 7,000 workers accepted in March. Workers with at least 20 years of seniority who agree to give up future benefits would receive $115,000 plus a voucher, which is far greater than the March offer.

G.M. will assume ownership of five plants — two in western New York, two in Michigan and one in Indiana — operated by the Delphi Corporation, its bankrupt former parts division.

Retiree benefits will be reduced as of July 1, at the direction of the Treasury, the union said. At that time, pending court approval, retirees will lose vision and dental coverage, among other changes.

After Jan. 1, retiree benefits will be paid by the trust fund, which currently contains about $10 billion. G.M. had sought to move up the date when the fund takes effect but in the end agreed to keep the original time table, the union said.

The dwindling of the beneficiary association fund alarmed union leaders, who agreed to establish it in two sets of negotiations during the last four years. G.M. at one time thought that investments in the association would grow to cover its $70 billion liability, once the U.A.W. assumed control of the fund early next decade.

But the fund has lost 30 to 40 percent a year, instead of the 9 percent growth that G.M. initially anticipated, people with knowledge of the situation said.

Nick Bunkley contributed reporting

As always, we at TILB are willing to point out the ridiculousness of these efforts.
Keep your eyes peeled for my upcoming post, The Grand Unified Conspiracy Theory which connects a lot of the dots.

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