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GM & Investor Rights

posted by Stephen Lubben

David Brooks has a generally smart column in today's Times about GM, in which he notes that the chapter 11 case can only resolve GM's operational and financial problems, it can't change GM's management.  And as I've noted before, there are good reasons to worry about GM's management, given their long history of saying the right things while doing the same old things that have had them in a 25-year slump.

But then Brooks drops this line: "the Obama plan rides roughshod over the current private investors and so discourages future investors."  If the first part of the sentence were true, I would understand the second part.  But what is the basis for the first part? He never explains it, and it comes off like some sort of talking point that accidentally made its way into the article.

I noted yesterday that GM has $27 billion in secured debt.  The Daily Bankruptcy Review (no link) today reports that GM has an estimated liquidation value of, at most, $9.7 billion.  The "Obama Plan" pays secured creditors in full and gives unsecured creditors 10% of the reorganized company and warrants for 15% more of the company.

Ridding roughshod?  The argument may have worked in Chrysler, it makes no sense here.

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Comments

One unanswered question, the answer to which may eventually come out, is why were the secured creditors of Chrysler treated differently from the secured creditors of GM?

The only reason I've been able to ascertain is that the Government wanted parties to sacrifice, and there were no lenders junior to the secureds in Chrysler - making them the victim of circumstance.

As for the argument that GM will benefit financially and operationally from the bankruptcy, that would typically be true. The accelerated process is limiting the ability to realize operational improvements while under the Court's protection. If the process were less rushed, there might have been additional operational improvements that could have been realized - perhaps including a better arrangement with the UAW (the work rules under the old and new plans are ridiculous - and reduce the ability of management to optimally incentivize or manage the workers).

There will be significant improvements in GM's financial structure.

The general expectation is that there will be a new Board and changes in management, but that will not be facilitated by the bankruptcy process (other than the Government's new position as controlling shareholder).

My problem with the Brooks column is that he offers a critique, but never gets around to the better alternative proposal that he would prefer instead. Is he calling for a full liquidation?

Maybe a better way to frame the media discussion is this: how much would the secured and unsecured creditors of GM have received without any government funding/loans (starting with the Bush administration's first loan)?

My guess is considerably less than what they will actually receive. The creditors are not being treated unfairly. They're receiving government money that they would not have received in normal bankruptcy proceedings. If you take out the government's money, under what scenario do the unsecured creditors receive anything (assumming a liquidation value of $12 billion)?

The government could have never loaned GM money, allowed it to go into bankruptcy, and bid on GM's assets in bankruptcy. My guess is that they would have spent less and owned 100% of the company.

Clarification -

You cite the Obama plan as paying secured creditors in full after implying that the extent of their security under bankruptcy convention is about 35.9 cents on the dollar.

Does the plan provide for this or for 100 cents on the dollar?

thanks anyone who can chime in on this.

Based on my reading of the March 10Q, GM has, excluding the facilities from the US, $4.625 billion of secured debt. They have a $4.5 billion secured revolving credit facility (fully drawn), and a $125 million secured credit facility. There is also a $1.5 billion US Term Loan, but that appears to be part of the Government's support.

Clearly, the assets support the secured debt.

The bulk of GM's borrowings, other than from the Government, are unsecured bonds of varying types. These were offered 10% of the equity and (now) warrants to purchase an additional 15% of the equity.

I'm believe Stephen intended to refer to the $27 billion as "unsecured" not "secured."

Paragraph 30 of the Sale Motion reads:

There is no viable alternative to the 363 Transaction. In light of
the substantial secured indebtedness of the Company totaling approximately $27 billion,
the only entity that has the wherewithal and is qualified to acquire the Purchased Assets
to assure the continued operation of the business is the U.S. Treasury-sponsored
Purchaser.

This includes secured debt owed to the UST -- I'm not sure why you would exclude it, since it clearly would have to be repaid in an alternative transaction.

Steve:

It depends on how you are looking at the situation.

I think, when we are discussing recoveries, we are referring to the external creditors since they are not controlling the transaction.

In Chrysler, the first lien had $6.9 billion. There were second (Daimler) and third (US) liens, but the focus was on the recoveries to the first lien. The second lien surrendered any rights and the third lien was controlling the transaction.

In GM, the 3rd party (external) lenders, in my opinion, are the equivalent to the first lien lenders. They are getting 100%. The Government is controlling the transaction, and they've decided to take a significant portion of their position as equity.

I think that, when people are commenting on the recoveries, they are thinking more about the non-Governmental parties. In GM's case that is the $4.625 billion of secured (there may be some additional relating to leases) and the $27 billion of bonds (coincidentally the same number noted for secured in the filing).

Does that make sense?

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