As GM asks for $16 billion more in U.S. federal assistance, their most contentious point is bankruptcy's a bad idea. We disagree. However, here's their argument from their just-revealed viability plan.
Basically, the General's two arguments against bankruptcy are first, that they'll see a sales drop, depending on whether the bankruptcy is "pre-solicited," a "cram-down" or a "traditional" process of anywhere from 4% (U.S. volume loss) and 3% (long term U.S. volume loss) to 13% (U.S. volume loss) and 10% (long term U.S. volume loss). Second, they believe that some forms of their $170 billion in debt cannot be easily wiped clean in a bankruptcy.
We happen to think, for at least the first argument on a sales drop, it's plain bunk. GM is already in a state of de facto bankruptcy and is already losing sales due to potential customers making other choices in the market. Secondly, many consumers are on the sidelines right now, so why focus on market share when people just aren't buying?
But more importantly, because of the overall economic climate, right now would be the most favorable time to receive a bankruptcy deal backed by the federal government, a situation that could provide a more favorable customer reaction than a straight bankruptcy. As far as the debt obligations arguments, we're still wading through that side of the argument. Frankly, so is GM.
But our initial thought is GM really believes they'll be able to get bondholders to reduce claims. However, that's almost an impossibility given the requirements by the Federal Government to show long-term viability and a restructuring plan for debt by March 31st, 2009.
A secondary concern for GM may be over Section 360 — the "Stalking Horse" provision. That provision allows a debtor who, instead of owning common stock, but rather bonds and liens on assets to make a bid for the company. If the "Stalking Horse" wins the bid, he owns the company for the cost of the debt and the bid. If it's a real concern, expect to watch someone buying up large chunks of GM debt at $0.20 - $0.30 on the dollar.
That's about as far as we've made it so far, so for the moment, enjoy GM's argument below from their viability plan:
As noted in the General Motors‘ December 2 submission, some industry observers have suggested bankruptcy is a reasonable, if not preferred, restructuring option-allowing for a more all-encompassing resolution of the Company‘s liabilities than otherwise possible. It has also been suggested that a bankruptcy proceeding can be quick, allowing the new company to be up and running in a matter of weeks.
―Quick‖ has seldom been the pace of bankruptcy proceedings in this country. Based on data supplied by Lakeview Capital, of 159 cases completed since 1995 involving companies with assets of $1 billion or greater, only 4 cases (3%) exited bankruptcy in 90 days or less. The vast majority of these cases took one year or more, with one-third taking two years or more. The size and scope of General Motors makes it unique relative to this sample, suggesting a longer versus a shorter duration.
The more important consideration is revenue loss. All research indicates bankruptcy would have a dramatic impact on GM sales and revenue. According to CNW Market Research, more than 80% of consumers intending to purchase a new vehicle (during the following 6 months) would not do so from a company that filed for bankruptcy. In the case of Daewoo Motor, this company experienced a permanent 40% reduction in business in South Korea following a two-year restructuring. If the South Korean market was as competitive as the U.S., Daewoo‘s revenue loss would likely have been far greater.
GM has attempted to model the potential cost and benefits of various bankruptcy scenarios. Although any model requires simplifying assumptions, which inherently cause them to understate various risks, the analysis confirms that a restructuring process outside of bankruptcy is highly preferable for all constituencies. The Company‘s detailed analysis of bankruptcy scenarios, compared to the proposed Restructuring Plan, is contained in Appendix L.
Structural Alternatives to Proposed Restructuring Plan
The Plan presented in this report is predicated upon restructuring the operations and
liability/capital structure of the Company without submitting to a U.S. bankruptcy process (―out
of court process‖).
An out of court process will achieve the key financial objectives of the plan without the trauma
and systemic risk inherent in a bankruptcy case. An out of court process demonstrates the
Company's ability to re-pay the U.S. Department of Treasury loans and to structure a viable
business with a positive net present value, credibility with consumers and a competitive
operating and capital structure, while minimizing the risk that further financial reorganization
will be required.
A fundamental element of the Company's restructuring plan is to avoid further revenue losses
that arise from bankruptcy. The out of court process is critical to that objective. Although the
Company recognizes that the out of court process does not afford the Company the option to use
bankruptcy powers to unilaterally impair claims, reject executory contracts and the like, the
Company believes that those potential benefits are more than offset by the actual and potential
negative consequences of bankruptcy. Specifically, the incremental portion of the Company's
liabilities that can be practically addressed in a bankruptcy is quite limited, compared to the level
of support and additional funding that would be necessary to mitigate revenue losses and other
Consumer confidence is essential to the Company's future success. For most consumers, the
purchase of a vehicle represents their second largest expenditure (after housing). Consumers
view resale value and the assured availability of warranty coverage and long-term parts and
service as critical inputs to their purchase decision. It is the judgment of the Company that a
bankruptcy filing would substantially, if not completely, erode consumers' confidence in GM's
ability to deliver on those requirements. The consumer, with a choice of a comparable product
backed by a manufacturer operating outside bankruptcy, is substantially less likely to opt for the
bankruptcy tainted product. The resulting deep and precipitous slide in the Company's revenue
would endanger not only the Company's viability, but that of countless of its dealers and
suppliers, which are in turn relied upon by other manufacturers and the public. In addition, a GM
bankruptcy would threaten GMAC's ability to fund itself in the capital markets, impairing
GMAC's capacity to provide wholesale and retail financing essential to support the viability of
The systemic risk to the automotive industry and the overall U.S. economy are considerable, just
as the bankruptcy of Lehman had a ripple effect throughout the financial industry. Indeed, the
risks relating to a bankruptcy in the automotive sector may be more extensive than Lehman
presented in light of the wider range of constituencies, profound employment effects and the
potential impact on consumer sentiment. Based upon exhaustive analysis, these risks outweigh
the benefits of a bankruptcy based approach to the Company's restructuring.
It should also be noted, as will be shown below, that the financing requirements of the Company
significantly exceed those in an out of court process, irrespective of the bankruptcy route chosen.
Additionally, many of the liabilities that could be impaired in a traditional bankruptcy process
could have the effect of shifting those liabilities to the U.S. Government.
To assess the relative merits of an out of court process, the Company has compared the projected
results of its viability plan against projected outcomes in three different bankruptcy scenarios.
The analysis included in this Appendix addressing each scenario necessarily makes a number of
simplifying assumptions, including that any bankruptcy proceeds in an orderly fashion along a
prescribed timeline. In truth and in practice, the process involves many risks, virtually all of
which involve delays in timing. To the extent that the Company enters bankruptcy, even via one
of the two accelerated strategies, there is an exceptionally high risk that the timeframes extend
beyond those presently assumed, rendering the projected DIP funding requirements understated
and optimistic. In a traditional Chapter 11 process designed to address all of the Company's
liability structure, given the complexity and scope of General Motors' global business operations,
there is a substantial risk that emergence from bankruptcy will prove impossible and a
liquidation pursuant to Chapter 7 of the Bankruptcy Code will result. Finally, given the
Company's financial position and the state of the credit markets, any DIP financing would need
to be provided by the U.S. Government. Otherwise, General Motors would not be able to
operate in Chapter 11 and would very likely be compelled to liquidate.
The three scenarios considered were as follows:
1. ―Pre-solicited or Pre-packaged Chapter 11‖ — Under this scenario, and as
contemplated in the Company's planned Bond/VEBA exchange offer, tendering
bondholders would be required to vote affirmatively to accept a Chapter 11 Plan of
Reorganization. If possible (because the Plan of Reorganization received the requisite
votes) and necessary (because the out of court process failed), the exchange plan would
be implemented in bankruptcy, binding 100% of the bondholders to accept consideration
equivalent to that contemplated in the out of court exchange. However, this scenario
requires an agreement in advance regarding the treatment of VEBA liabilities acceptable
to bondholders, as well as a commitment for government financing. No other creditor
would be impaired. Existing shareholders would be almost entirely diluted.
This scenario is assumed to require approximately 60-65 days to achieve confirmation of
the plan and exit from Chapter 11. It will cause a quite severe near-term negative revenue
impact during the bankruptcy proceeding, and a less severe but still serious long-term
negative revenue impact after exiting from Chapter 11.
2. ―Pre-negotiated Cram-Down Plan‖ — Under this option, which is more
aggressive than a consensual pre-packaged Chapter 11 approach discussed in Scenario 1
above, the Company would seek a larger conversion of debt to equity. This strategy
could take many forms, including: (A) complete conversion of the bonds to equity; (B)
reduction in obligations from impairing additional classes of claims (including potentially
litigation liabilities, dealer claims and contract rejection damages); and (C) greater to
perhaps complete equitization of the VEBA obligations. This scenario is assumed to
require a minimum of 90 days for its least aggressive variant, up to as long as six months
or more for more aggressive variants, such as converting a portion of other liabilities to
equity. If the Company were to pursue a larger or complete conversion of the VEBA to equity, the assumption is that this would be a vigorously contested, endangering
resolution with the UAW and potentially forcing the Company into an extended
traditional Chapter 11 case or free-fall bankruptcy as described in Scenario 3.
For analytical purposes, GM has assumed only the benefits in (A) above, or conversion of
the bonds to equity, completed in the shortest (90 day) timeframe possible. The negative
revenue impact during this option is expected to be even more severe, with greater
permanent effects, compared to the pre-solicited process described in Scenario 1. In
addition, the cram down process results in an incremental $4 billion debt reduction, or
complete conversion of all U.S. unsecured debt to equity, but also involves significantly
higher levels of DIP financing required which, in turn, produces a significantly negative
NPV. There would be significantly less negative impact than in a traditional Chapter 11,
which has broader implications for the industry as a whole. However, this scenario
includes elements likely to elicit opposition, which increases the timing risks and the risk
that Scenario 2 might evolve into the substantially less favorable Scenario 3.
3. ―Traditional Chapter 11 Case‖ — Under this scenario, the objective would be
to accomplish a more comprehensive restructuring of the liability portion of the balance
sheet, along with substantial asset dispositions, using all of the tools traditionally
available to debtors to restructure through a court supervised process.
This process could be expected to require 18-24 months, with an estimated 24 months
used for analytical purposes in this appendix. Financially, while the traditional
bankruptcy process allows for greater liability reduction potential, incremental funding
requirements surge close to a $100 billion or more, reflecting catastrophic revenue
reduction impact as well as wholesale (i.e., dealer) financing requirements and supplier
support. The revenue impact during this type of bankruptcy would be very severe, with a
substantially delayed recovery time and significant potential for permanent, significant
damage. Indeed, there is considerable doubt whether the Company would survive this
To assess the risks and benefits of each strategy, the Company must weigh the potential
additional ―cleansing‖ or liability reducing benefits of each strategy against the ―revenue erosion‖
impact. Key simplifying assumptions in the analysis are as follows: (1) that global revenue
impact would be proportional to that experienced in the U.S.; (2) that DIP financing, which the
Company believes would not be available today in sufficient size through traditional means,
would be provided by the U.S. Treasury; and (3) that the Company under a bankruptcy scenario
would request substantial and longer term U.S. Government backstop of warranty coverage, and
other customer protections, to address consumer concerns, particularly during the bankruptcy
court administration period (which would be helpful, but would not address resale value,
competitive threats and other lingering customer concerns).
The remainder of this Appendix discusses the analysis in detail. Table A below summarizes the
Company's conclusions as to the potential results of each process.
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