
The New York Times has published an interesting article outlining how the government may use the Chrysler bankruptcy process as a learning tool for how to reshape GM.
It is pointed out that the two companies are rather different. GM has three times the employees and twice the number of plants. According to Rahm Emanuel, Mr. Obama’s chief of staff, “G.M. is very different than Chrysler, but I suppose the one lesson for G.M., and all the other players, is that this is a moment when a Democratic president said, ‘I am really willing to let a company dissolve, and there’s not going to be an open checkbook.’ There’s got to be real viability.”
If the ongoing Chrysler bankruptcy works out well, it is likely that option may also be applied to GM. It is already a given that GM will not be liquidated and will survive.
GM’s most recent plan to cut 47,000 jobs, 12 plants, 4 brands, and 2600 dealerships has not yet been approved by the government and some fear may still not be enough to allow profitability in the current automotive market.
Chrysler’s secured bonds are expected to be covered by $2 billion in cash through bankruptcy which will be paid out to a total of 46 lenders. GM on the other hand has about 10,000 unsecured bondholders. The plan is for those debts to be traded not for cash, but for pure stock, 225 shares for each $1000 in debt. Beyond that, 55% of GM would then be owned by the government and 40% by the UAW.
The government now has all the leverage against bondholders who would otherwise be paid very little in bankruptcy court. Indeed, the fear of bankruptcy now hangs heavy over those bondholders heads as the government has already revealed its willingness to let Chrysler go that route.
Though Obama has stated he has no interest or skill in running car companies, he will have no choice as a 55% owner, though he hopes the government’s stake could eventually be sold for a profit.
However, Obama’s expectation for GM to produce low emission high-efficiency cars like the Chevy Volt may conflict with those profitability expectations. It is already well-known the Volt may not lead to profits for two or three generations and potentially hundreds of thousands of vehilce sales.
How the government will handle that dilemma remains unclear.
Source (New York Times)