The June 1st, government imposed, deadline for a General Motors restructuring or bankruptcy filing is less than a week away and the situation is looking grim. While the company was able to work out agreements with the United Auto Workers and the Canadian Auto Workers unions that would allow cuts to wages and health care cost, the big unknown at this point are the bond holders.
GM set an internal deadline of 5/26/09 to reach an agreement on debt restructuring. No news has yet hit the wires of this effort, but can one take the “no news is good news” approach in this situation? I don’t know. Based on the details floating around the press, the bond holders would give up a lot in order to keep GM out of bankruptcy. Their stake would be reduced to 10% of the company – from their current 40%. That is a massive loss. Furthermore, if the proposed deal does gain approval the government would be a 50% owner in the new company.
But what if a restructuring deal cannot be reached, then what?
A number of groups would be hit if the company slides into bankruptcy. One has to figure that all shareholder equity would be wiped out. You know that stock that is virtually worthless now? It will be completely worthless if bankruptcy takes place.
Employees and dealerships may be placed in difficult position where they have no options – they could be out of jobs, the locations closed down – where as before bankruptcy they may have options to be bought out or able to have some flexibility in retaining their position(s).
Suppliers would not only face the process of filing claims against the bankrupt company, they may face bankruptcy themselves. Companies such as Lear, American Axle, TWR, and Dana all may face difficulty due to the loss of revenue and outstanding debt.
General Motors themselves may also fall victim to bankruptcy. Will customers start moving away from purchasing their products (well, more than they have) if bankruptcy takes place? Fiat is concerned about Chrysler’s financial deterioration since the company went belly up, would the same thing happen to GM? Would the business fundamentals fall off yet another cliff?
Ironically, bankruptcy may be the best option for the bond holders as they stand to obtain more money and potentially more ownership in a new company, assuming a new company is organized, than simply letting the government come in and have their way with the company.
I’ve argued for some time that General Motors and GMAC need to be left to their own devices or simply die. Years and years of poor management decisions will come to a head, one way or another, in the next two weeks. While it would send a very poor signal if the Government simply allowed the company to restructure while screwing the bond holders, I fear this will be the patch chosen – even if General Motors goes into bankruptcy.
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