Wednesday, February 18, 2009

GM: Unrealistic Expectations

GM: Unrealistic Expectations

As promised, General Motors (GM) and Chrysler delivered their turnaround plans to the Treasury Dept. on Tuesday, Feb. 17. While both companies have slashed costs, both say they need more government cash and concessions from the union or their creditors to survive the downturn.

GM got another $4 billion from Treasury on Tuesday, completing a government commitment made in December to give the automaker $13.4 billion. But GM says that given the weaker economy and declining auto market, the company still could need as much as $30 billion in total. Chrysler has asked for $5 billion on top of the $4 billion it has borrowed from the government.

Bondholder and UAW Debt Burdens

It will be up to Treasury to decide if the two companies' plans go far enough to prove that they are viable and will be able to pay the money back. There is risk that GM can't get all of the concessions it needs and that sales won't rebound fast enough to build revenue. In GM's case, the company still has to convince its bondholders and the United Auto Workers to reduce future debts. The car market will also need to revive in the next couple of years to the levels that both automakers have forecast.

And there's still a lot of work to be done. GM has two major issues that need to be resolved. First, the company has to negotiate with its bondholders to drop its unsecured debt burden from $27 billion to about $9 billion. Second, GM owes the UAW $20 billion to start a union-led trust fund to manage retiree health care.

GM wants to give the UAW half in cash and half in stock. But like bondholders, the UAW has balked. GM Chairman and Chief Executive Officer G. Richard Wagoner Jr., said the company is making good progress on both fronts. But GM could not strike a deal before the proposal to Treasury was due.

Getting both parties to reduce GM's long-term debts will be vital to ensuring the company's viability. The automaker has more than $60 billion in debt between its creditors and the union. "What has weighed on us more than anything," Wagoner said, "is that we have a huge debt burden. We had to raise money to pay $103 billion in post-retirement benefits over the last 15 years."

Wagoner said GM's cost cuts will make it profitable in a car market of 11.5 million to 12 million cars, about 1 million fewer vehicles than the company said it needed in December before it cut more jobs. If all goes according to plan, GM could return to profitability within 24 months, Wagoner said. "Supporting GM's viability is a sound investment for U.S. taxpayers and one that will be paid back," Wagoner said.

Shuttle Diplomacy

GM has an offer on the table to a committee representing its bondholders, which the legal and financial advisors have endorsed. It will be up to the bondholders to examine GM's turnaround plan and agree to the terms of the offer to get a deal done.

GM said it also has a deal to reduce its labor costs with the UAW, but the company wouldn't give details until UAW President Ron Gettelfinger took it to his members for a ratification vote.

But if Chrysler's deal with the UAW is an indicator—and the union usually treats all three automakers somewhat equally—GM should be able to cut its remaining $20 billion in cash obligation to the union's health-care trust by 50% and give the rest in stock. Chrysler said that the UAW agreed tentatively to swap half of its $10 billion in health-care funding obligations for equity if Chrysler can successfully get banks and other debtholders holding $6.9 billion in debt to take two-thirds of that in equity such as preferred stock.

GM is in a similar pickle. The bondholders will want to see that GM's deal with the UAW goes far enough. And the UAW wants to make sure that their concessions are going to make Wall Street investors whole. So both companies will have a job of shuttle diplomacy to get both deals done.

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  • 1 comment:

    The Intellectual Redneck said...

    The UAW has failed to give serious concessions to the Big Three as part of a deal to satisfy the terms of the automotive bailout. They have only offered token reductions that will mean very little to Detroit's bottom line. According to the Associated Press the UAW agreed to limit overtime, reduce cash bonuses, forgo cost of living pay increases and limit supplemental pay for laid-off workers. Are they serious? Who in the automotive manufacturing sector is working overtime now? Auto production is down almost 40% this year. Also, they are going to reduce their cash bonuses? How do you get a cash bonus when you have helped drive your company bankrupt? Who do they think they are? Bank executives? No one I know gets supplemental pay from their former employer when they are laid-off. When a company can not afford to pay their current employees, they should not be giving money to laid-off employees. The UAW have refused to take a cut in their base wages. The retiree health care cost issue is still not resolved. The 'Big Three' want the UAW to take half of their 20 billion dollar payment as stock. The UAW only wants to delay the payment, but this issue is still not settled. The CEO's of GM and Chrysler LLC should be embarrassed to beg for another 17 billion in taxpayer dollars. There is something unjust about taking money from a worker struggling by on 20 or 30 thousand dollars a year and using it to save the job of someone with a $70,000 wage and benefit package. The UAW will declare this deal a major concession. The leaders of the 'Big Three" will stay silent because they need more bailout money. The Obama Administration will look the other way and hand over more of our tax dollars.