GM's New Escape Route: Partial Nationalization
Tuesday, April 28, 2009
Once a symbol of capitalist might and U.S. industrial prowess, General Motors would be half owned by the Treasury under a new sweeping plan that would also shut down GM's Pontiac operations, lay off 21,000 workers and impose harsh terms on the company's bondholders.
The partial nationalization proposal -- a last-ditch effort developed by GM and the Obama administration's auto task force to keep the leading U.S. carmaker out of bankruptcy -- raised hackles in Congress and ratcheted up the game of brinkmanship with the company's bondholders, who have until May 8 to accept or to try to negotiate better terms.
If the bondholders reject the terms, GM would probably declare bankruptcy, chief executive Fritz Henderson said, potentially raising uncertainties for suppliers, workers and customers. That possibility loomed large yesterday after bondholders called the offer "neither reasonable nor adequate."
If the plan goes forward, it would mean a leaner and less indebted GM, formally controlled by the federal government. As it is, the government has been playing a large role at the company, asking for the resignation of the previous chief executive, G. Richard Wagoner Jr., and ordering that the company's board be reconstituted. The move would represent one of the largest ownership stakes the U.S. government has ever taken in an American manufacturer.
But the Obama administration said yesterday that it would not seek any seats on the company's board and vowed to take a hands-off approach to GM management. "This administration and this government have no desire to run an auto company on a day-to-day basis," said White House press secretary Robert Gibbs.
"Government ownership is an unfortunate outcome of this, not a goal," said one person familiar with Obama administration deliberations and who spoke on condition of anonymity in order to preserve his relationships with officials. He said the government "could have gotten nothing for something, or something for something" and that it insisted on a 50 percent stake to leave open the potential to recover some of the $18 billion the Treasury Department has already lent GM and the additional $9 billion that it would inject under the new plan.
Some members of Congress and economists expressed concern that the government was effectively nationalizing GM and might exert influence over company decisions, despite its denials. Luigi Zingales, a finance professor of finance at the University of Chicago, said it would be "irresistible for the political system not to exercise some pressure. Do you not think they will push GM to make green cars? Maybe that's the right thing to do and maybe not. But it shouldn't be decided by Congress."
Meanwhile, however, bondholders pose a major stumbling block to the restructuring. Under the proposed offering which GM filed with the Securities and Exchange Commission, investors holding $27.2 billion of GM bonds would swap those bonds for 10 percent of the equity shares of the restructured company. The United Auto Workers would get up to 39 percent of the company in return for half of the $20 billion GM owes to a health fund for retired workers. Current shareholders would get 1 percent of the new shares.
The Treasury said that to meet restructuring goals and to fulfill bond covenants, the restructuring proposal must win the support of 90 percent of the bondholders, an uphill battle because bondholders and analysts said the union had received more favorable terms even though its legal claim in bankruptcy court would be equal to the bondholders'. Investors who bought GM bonds in 2003 are particularly upset at being portrayed as obstacles because those bonds were used to provide funds for GM workers' pension plan.
"We are deeply concerned with today's decision by GM and the auto task force to offer only a small, inequitable percentage of stock to its bondholders in exchange for their bonds," advisers to an ad hoc group of bondholders said in a statement last night. "We believe the offer to be a blatant disregard of fairness for the bondholders who have funded this company and amounts to using taxpayer money to show political favoritism of one creditor over another."
Some advisers said that GM bondholders, if they are patient, might get more money from a bankruptcy proceeding than they are being offered under the new restructuring plan.
"In our view, the offer is unlikely to be accepted by bondholders, who are in effect being asked to sacrifice most of their claims in order to help GM satisfy commitments to the UAW. We therefore believe that unless the offer is revised before May 8, GM could potentially file for Chap. 11 protection by the end of next month," said Brian A. Johnson, an auto analyst for Barclays Capital. Johnson estimated that bondholders who took shares of common stock would get zero to 5 percent of the face value of their bonds. Recently, most GM bonds were selling at 8 to 13 cents for every dollar.
But a letter to bondholders that was part of the GM prospectus issued yesterday warned that "if we seek bankruptcy relief, you may receive consideration that is less than what is being offered in the exchange offers and it is possible that you may receive no consideration at all for your GM notes."
Asked about the fairness of the deal, Henderson said that the Treasury dictated the terms for the bondholders, requiring that their future stake be limited to no more than 10 percent of the company. "We went to the maximum and offered the 10 percent," Henderson said in an interview.
Administration officials argued that the UAW was making other sacrifices in wages and benefits, and that the company could not function without workers.
The decision to shed more workers drew immediate criticism from some in Congress, who said the government aid was supposed to save jobs, not cut them. "Our state has been hit hard enough already," Rep. Gary Peters, (D-Mich.) said in a statement. "The purpose of providing General Motors taxpayer funded loans was not just to keep GM in business, but to preserve American jobs. . . . We all know that GM must make cutbacks, but preserving as many American jobs as possible must be the primary goal of all restructuring efforts."
The plan unveiled yesterday also would accelerate and expand the closing of GM dealerships. The company also said it would cut its U.S. dealer network to 3,605 by the end of 2010 from about 6,200 in 2008. Its earlier plan aimed to trim that network to 4,200 by 2014. The new GM would focus on only four brands.
The closure of GM's Pontiac line was symbolic of the company's change of fortune. Introduced in 1926 and named, like the town in Michigan, after an 18th-century Ottawa Indian chief who united tribes to fight the British, Pontiac was popular for more than half a century. The Pontiac Web site yesterday was still advertising cars with a "total confidence" package of warranties and payment protections.
Pontiac will be phased out by 2010, and Henderson said the company does not expect to build Hummers, Saabs and Saturns after this year. Henderson said the company had received several bids for Hummer.
"Big is only good if you use it to your advantage," Henderson said at a televised news conference.
"The objective is not to survive, the objective is to develop an operating plan that allows us to win," Henderson added. "We need to have a more sustainable business model because, candidly we only want to do this once," he said. "We want to have this as truly a defining moment for our company."
Staff writers Peter Whoriskey and Kendra Marr contributed to this report.