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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