GM’s CFO Says Company Will Skip $1 Billion June 1 Debt Payment
By Chris Haak
04.22.2009
GM’s Chief Financial Officer, Ray Young, told reporters at a Chinese auto summit in Detroit (how appropriate!) today that GM would not be making a $1 billion debt payment that is due on June 1. Instead, he said that GM would either have completed a debt-for-equity exchange or would be in Chapter 11 bankruptcy protection by then.
So this is it. GM’s end game. Feel free to insert any necessary sports analogy that you see fit here, but the fact remains that GM doesn’t expect the government to give it any more money after the end of May (when its 60-day lifeline expires) and that its survival will take one of two paths: either Chapter 11 bankruptcy or strong-arming the bondholders into accepting pennies on the dollar for the debt that GM owes to them, plus equity that is already nearly worthless (and would be completely worthless in Chapter 11).
The “B word” – bankruptcy – has gone from being flatly denied at GM as impossible, unlikely, and a death blow if you look back just three years ago to something that now both the CEO and CFO have said is “probable.” At least they’re being honest about the company’s prospects. The debt-for-equity swap isn’t likely to get much traction, either – the company has been trying for a long time to get bondholders (namely large Wall Street firms, but also thousands of individual, small-potatoes investors) to accept its proposal to give them nearly-worthless GM shares and a small amount of cash in return for forgiving the debt. Chrysler had a similar problem earlier this week, when the US government tried to get Chrysler’s debt holders to reduce the company’s $7 billion debt to $1 billion. The lenders’ counteroffer was to reduce it to $4.5 billion, and give them a third of the company’s equity as well.
So why would GM’s CFO want to spook the market and talk in advance about defaulting on a payment? It’s all part of the game. By announcing that GM will default on the payments (euphemistically called “skipping” in some circles), GM is lowering the value of the bonds and therefore increasing the likelihood that the bondholders would be willing to capitulate negotiate on the debt-for-equity swap.
In other signals that GM is readying itself for Chapter 11, Young said that he’s been immersing himself in bankruptcy preparations for the past four months and that he’s “gotten very smart on bankruptcy” during that time. He also added that GM has the smartest people in bankruptcy working on it for them, and that they expect to file and emerge quickly. The bankruptcy talk surely isn’t helping the public’s perception of GM, but it’s also forcing debt holders to come to the table, and hopefully (for GM) accept more severe terms.
One bright spot of news for GM is that, according to Automotive News, GM creditors are open to “deep concessions” provided GM can produce a viable business plan and get equal concessions from other stakeholders (workers, management, dealers). The quote was attributed to an anonymous source that was familiar with the bondholder committee’s plans. Perhaps GM will have more success than Chrysler in getting bondholder concessions because GM may be worth more to them as an ongoing concern, while Chrysler’s bondholders probably sense that they would get more than their 14 cents on the dollar for debt if Chrysler was just liquidated and its parts sold off to pay the debts. Also, GM’s debt is largely unsecured, while Chrysler’s is secured by property, plants, and equipment, which gives Chrysler’s bondholders more leverage than GM’s have.
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