BUFFALO’S BUSINESS
Saving GM may require bankruptcy
So many issues, so little time for General Motors Corp. President Obama last week gave the automaker less than 60 days to do what it has failed to do over the last two decades: Come up with a workable plan to slim down and shake up so that it can survive in the long run.
Talk about a tall order. But if GM wants to stay out of bankruptcy, it had better succeed.
It won’t be easy, though. The automaker
needs to convince its bondholders, who are owed $27 billion, to swap at least two-thirds of that debt for GM stock, which has a decent chance of ending up being worthless.
It needs to convince the United Auto Workers, which already has agreed to steep concessions, to accept GM stock for half of the $20 billion that GM owes to a trust fund to cover retiree benefits.
And it needs to go back to the drawing board to come up with a new plan for an even leaner GM that can make money on an even lower base of car and truck sales than the plan it submitted to the federal government in February. That means more plant closings and more job cuts, beyond the 47,000 the automaker already planned to eliminate.
“The critical issue for GM now is whether the unsecured creditors and the UAW will be willing to make concessions,” says David Whiston, a Morningstar Inc. analyst.
So far, the concession talks haven’t been promising, but the renewed threat of bankruptcy should add a new sense of urgency.
The government—widely viewed as the only lender willing and able to provide the funding GM needs, either in bankruptcy or out—is likely to decide by June 1 whether GM can remake itself successfully, or needs to file for bankruptcy.
GM’s new chief executive officer, Fritz Henderson warned last week that a government- backed bankruptcy filing now is “more probable,” saying a “strategic bankruptcy” filing with government funding would be less risky than traditional bankruptcy reorganization. The last thing GM needs is a drawn-out bankruptcy process, like the one that auto parts maker Delphi Corp. began in 2005, with no end still in sight.
“They had to use bankruptcy as a hammer to get the parties back at the negotiating table,” says Arthur Wheaton, the director of labor studies at Cornell University’s School of Industrial and Labor Relations in Buffalo.
Ousted GM CEO Rick Wagoner “had said many times that bankruptcy was not a viable option. Now you’ve got the new CEO saying bankruptcy is more probable,” Wheaton says. “That’s a huge change.”
Both Whiston and Wheaton think getting the UAW to agree to more concessions will be easier than convincing the bondholders to take less.
“It’s going to hurt everybody,” Wheaton says.
“The dealerships should be worried. The retirees should be worried,” he says. “It’s pretty scary for the UAW. They’re sweating bullets.”
Just how serious the Obama administration is should be more apparent as Chrysler nears its May 1 deadline to form an alliance, most likely with Italian automaker Fiat. If Chrysler doesn’t form an alliance, the Obama administration has indicated it won’t provide the $6 billion in government loans it needs to keep operating.
If that happens, Chrysler could be forced to liquidate, which would deliver a big blow to auto parts suppliers, including American Axle&Manufacturing, which gets about 10 percent of its sales from Chrysler.
If the government lets Chrysler fail, Wheaton says, the pressure to work out a deal will be even greater on GM, its bondholders and the UAW.
Log into MyBuffalo to post a comment
MyBuffalo is the new social network from Buffalo.com. Your MyBuffalo account lets you comment on and rate stories at buffalonews.com. You can also head over to mybuffalo.com to share your blog posts, stories, photos, and videos with the community. Join now or learn more.
Reader comments
Learn more about our moderation system.