Bankruptcy Query

Megan McArdle outlines some of the latest terms of a GM creditor settlment.  The interesting facts for me were:

  • Creditors get 10% of equity in exchange for $27 billion in concessions¬† ($2.7B per percentage point)
  • Employees get 39% of equity in exchange for $10 billion in concessions ($0.26B per percentage point)

McArdle argues that there are good reasons bankruptcy courts tend to give labor a good deal, and having argued all along to allow bankrupcy courts to sort this mess out following the usual rules, I am not going to reverse myself.

But is it really the case that, push come to shove, bondholders get a deal 10 times worse than employees?  If this is the case, I am surprised people ever buy bonds in a company with a large employee retirement overhang.


  1. m:

    You've seen the news about the UAW and Chrysler, haven't you? 55%. Fiat? 35%. US Government and secured lenders together? 10%.

    Okay, Obama, we get it. You're a Socialist. Congrats. Now stop.

  2. Henry Boman:

    Well, there are surely many more employees [that is, voters] than bond holders, and GM employees tend to vote correctly. Plus, it seems likely that the bond holders might have more financial resources (i.e., cash) than GM employees, so this way the wealth, or what little wealth is left, gets spread around. Rather simple. Just the way Karl would like it.

  3. Tim:

    Since the Federal Government is first in line as creditor; it really wants this deal. The summary handwaves the important point why -- the equity exchange is in lieu of payments to the UAW's VEBA. If GM were to file for Chapter 11; the UAW pension becomes the obligation of the Pension Benefit Guarantee Corporation, and pseudo-government agency similar to the FDIC. Once the VEBA is funded; a GM Chapter 11 filing does not push the UAW pension onto the PBGC.

    Interesting side note about GM. The Treasury rejected GM's pull-ahead payment to Delphi; and rejected GM reacquiring Delphi's Steering Gear. This pushes GM to the brink of an involuntary Chapter 11 filing; and Delphi to the brink of a Chapter 7 liquidation.

    Delphi, which is ready to emerge from Chapter 11 reorganization, can't get recapitalization funding in the current credit/security market; and was depending on the pull-ahead payment and selling Steering Gear for operating cash until it can line up funding. GM is dependent on Steering Gear because almost all of GM's product sources those parts. No Delphi, no GM production.

    Delphi is also a supplier to the rest of the OEMs, so this really is close to the supply chain collapse that everybody fears.

    And no, it isn't easy to re-source. Figure between 6 weeks to 24 weeks to get a new supplier up and running. The short time would start after the OEM gets their tooling out of the closed facility; the long time would be if the OEM had to re-tool the parts.

  4. Bill:

    Well, you just hit on the reason that there have never been any automakers in my portfolio.

    Not only have US automakers tended to produce inferior product, but they've been under the UAW thumb for most of my lifetime. Not a situation that indicates any reasonable chance of long-term profitability.

  5. diz:

    Well, I said all along: flush the equity and let the bondholders and unions negotiate over what's left.

    I'm not sure where such a negotiation would have ended up. I am pretty sure it is not so simple as the amount of previous claims. Without any union concessions, the bonds would be near worthless. The company if hemorrhaging cash.

    However, the bondholders consent the union contracts/jobs would be pretty worthless as well. The bondholders could and would shut operations immediately and sell off what assets they could for what money they could get.

    The negotiation would just be big game of chicken. I don't think you can guess what the results would be.

    I guess you can assume the bondholders would need to feel they had something worth more than they could get in liquidation, which means that at a minium the employees would have to take enough wage concessions to make the company that profitable.