US Government May Take Controlling Share of General Motors
Debt-for-equity swap would give government more than 50% stake if plan is accepted
The ailing car maker General Motors has proposed handing a controlling stake of more than 50% to the US government as it struggles to reach a deal with its lenders to avert imminent bankruptcy.
The nationalization, in effect, of the biggest US motor manufacturer would be part of a huge debt-for-equity swap as GM tries to shed $44bn (£30bn) of $62bn in crippling liabilities owed to the government, trade unions and bondholders.
But the deal is by no means certain to succeed as it requires the consent of bondholders, who would get only 10% of the company, forcing them to write off billions of dollars. Existing shareholders would be left with only 1%.
With its future on a knife-edge, GM delivered a blunt warning that unless its creditors accepted the plan, it would declare bankruptcy and leave the courts to carve up the company. Fritz Henderson, the chief executive, told a press conference at the company's headquarters: "If this cannot be accomplished out of court, we'll go into court and restructure GM under bankruptcy if it's necessary."
As it struggles to stay afloat, GM has deepened cuts that will include 23,000 job losses by 2011, the closure of 16 of its 47 factories in the US and a 42% drop in the number of dealers selling its vehicles.
GM announced it was shutting its 83-year-old Pontiac marque as it slims its portfolio of brands to focus on just four names in the US: Chevrolet, Cadillac, Buick and GMC. The gas-guzzling Hummer and Sweden's Saab will either be sold or closed by next year but GM made it clear that Britain's Vauxhall brand was not under threat.
Summing up the company's predicament, Henderson described the position as "difficult, challenging and painful".
"None of us like this situation we're in but it's our job to do something about it," he said. "We need to have a more stable and sustainable business model because, candidly, we only want to do this once."
A tough-talking GM veteran, Henderson has led efforts to rescue the company since the Obama administration sacked his predecessor, Rick Wagoner, last month. GM and its smaller rival, Chrysler, are teetering on the brink of oblivion and are struggling to convince the government to extend further financial support. "The task at hand in terms of what we need to get done is formidable," Henderson said. "But it can be done."
Under the company's plan, the US treasury and the United Auto Workers' union would get 89% of the company between them. In return, the government would write off half of the emergency lending extended to GM by US taxpayers.
The union's shares would replace the billions of dollars due to be pumped into a trust fund to cover employees' healthcare.
GM has offered a 10% stake to bondholders, who are owed $27bn – a tough proposition to swallow. For each $1,000 of loan notes, bondholders would get 225 shares, worth little more than $550 at today's market price.
The Obama administration insisted that private-sector creditors should get no more than this slim return, demanding that unions and taxpayers receive the lion's share of the company. But in order to proceed, the proposal must be accepted by an overwhelming majority of 90% of bondholders by a deadline of 1 June.
Analysts said this was an extremely tough hurdle. "We don't think this debt-for-equity swap has a lot of chance," said Rebecca Lindland, an analyst at IHS Global Insight. "The bondholders are not happy with what they're being offered."
She said many bondholders were likely to believe they could get a better deal under a bankruptcy arrangement: "The Obama administration may be more pro-union than a bankruptcy judge but it's really a roll of the dice."
Jeremy Anwyl, chief executive of the auto research website Edmunds.com, was similarly skeptical: "There's a lot of bluffing and double-bluffing going on. There's no reason for bondholders to accept this if they think they can get a better deal under bankruptcy."
After months of tough negotiation, the clock is ticking down for the US motor industry. GM's smaller rival, Chrysler, has a deadline of Thursday to strike a rescue deal with Italy's Fiat without which the US government has said it will withdraw financial support.
For GM, the challenge is to shrink to a scale where it can break even with sales of 10m cars in the US annually, rather than the previous rate of 15m to 17m.
"It's been my theory over time that big is only good if you use it to your advantage," said Henderson. "As a company, our overall performance has just not been adequate."
Pontiac, long known for its sporty designs and once marketed as GM's "excitement division", is a prominent casualty. In Europe, however, Henderson signaled ongoing commitment to Vauxhall cars, which are produced at factories in Ellesmere Port on Merseyside, and in Luton. He said the company had a "fantastic team" running the brand: "I've never had an interest in changing Vauxhall in the UK."
The nationalization, in effect, of the biggest US motor manufacturer would be part of a huge debt-for-equity swap as GM tries to shed $44bn (£30bn) of $62bn in crippling liabilities owed to the government, trade unions and bondholders.
But the deal is by no means certain to succeed as it requires the consent of bondholders, who would get only 10% of the company, forcing them to write off billions of dollars. Existing shareholders would be left with only 1%.
With its future on a knife-edge, GM delivered a blunt warning that unless its creditors accepted the plan, it would declare bankruptcy and leave the courts to carve up the company. Fritz Henderson, the chief executive, told a press conference at the company's headquarters: "If this cannot be accomplished out of court, we'll go into court and restructure GM under bankruptcy if it's necessary."
As it struggles to stay afloat, GM has deepened cuts that will include 23,000 job losses by 2011, the closure of 16 of its 47 factories in the US and a 42% drop in the number of dealers selling its vehicles.
GM announced it was shutting its 83-year-old Pontiac marque as it slims its portfolio of brands to focus on just four names in the US: Chevrolet, Cadillac, Buick and GMC. The gas-guzzling Hummer and Sweden's Saab will either be sold or closed by next year but GM made it clear that Britain's Vauxhall brand was not under threat.
Summing up the company's predicament, Henderson described the position as "difficult, challenging and painful".
"None of us like this situation we're in but it's our job to do something about it," he said. "We need to have a more stable and sustainable business model because, candidly, we only want to do this once."
A tough-talking GM veteran, Henderson has led efforts to rescue the company since the Obama administration sacked his predecessor, Rick Wagoner, last month. GM and its smaller rival, Chrysler, are teetering on the brink of oblivion and are struggling to convince the government to extend further financial support. "The task at hand in terms of what we need to get done is formidable," Henderson said. "But it can be done."
Under the company's plan, the US treasury and the United Auto Workers' union would get 89% of the company between them. In return, the government would write off half of the emergency lending extended to GM by US taxpayers.
The union's shares would replace the billions of dollars due to be pumped into a trust fund to cover employees' healthcare.
GM has offered a 10% stake to bondholders, who are owed $27bn – a tough proposition to swallow. For each $1,000 of loan notes, bondholders would get 225 shares, worth little more than $550 at today's market price.
The Obama administration insisted that private-sector creditors should get no more than this slim return, demanding that unions and taxpayers receive the lion's share of the company. But in order to proceed, the proposal must be accepted by an overwhelming majority of 90% of bondholders by a deadline of 1 June.
Analysts said this was an extremely tough hurdle. "We don't think this debt-for-equity swap has a lot of chance," said Rebecca Lindland, an analyst at IHS Global Insight. "The bondholders are not happy with what they're being offered."
She said many bondholders were likely to believe they could get a better deal under a bankruptcy arrangement: "The Obama administration may be more pro-union than a bankruptcy judge but it's really a roll of the dice."
Jeremy Anwyl, chief executive of the auto research website Edmunds.com, was similarly skeptical: "There's a lot of bluffing and double-bluffing going on. There's no reason for bondholders to accept this if they think they can get a better deal under bankruptcy."
After months of tough negotiation, the clock is ticking down for the US motor industry. GM's smaller rival, Chrysler, has a deadline of Thursday to strike a rescue deal with Italy's Fiat without which the US government has said it will withdraw financial support.
For GM, the challenge is to shrink to a scale where it can break even with sales of 10m cars in the US annually, rather than the previous rate of 15m to 17m.
"It's been my theory over time that big is only good if you use it to your advantage," said Henderson. "As a company, our overall performance has just not been adequate."
Pontiac, long known for its sporty designs and once marketed as GM's "excitement division", is a prominent casualty. In Europe, however, Henderson signaled ongoing commitment to Vauxhall cars, which are produced at factories in Ellesmere Port on Merseyside, and in Luton. He said the company had a "fantastic team" running the brand: "I've never had an interest in changing Vauxhall in the UK."
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