Sunday, February 15, 2009


In a few days GM will report on the status of its negotiations primarily with the UAW and the bondholders. It appears from various press reports that GM is having trouble getting the bondholders and the UAW to agree to government required concessions. Furthermore, in the absence of the 'car czar', there doesn't appear to be a government representative at the negotiating table. This is an odd way to go about such negotiations.

First of all, this is being done backwards. The first step in any financial restructuring is a stand alone business plan that shows that GM's restructured operations are viable with NO debt.

Second, after such an operating plan is agreed upon by the various parties in interest, the resulting operations are valued and the predictable cash flows determine how much debt can be serviced at market rates.

Third, the value is divided upon amongst the parties based upon their priorities with the most senior creditors getting debt until there is no more debt capacity left (other than for a working capital line) and the rest of the creditors getting equity until the value of their claims are satisfied with equity. Any equity leftover would go equity holders; highly unlikely in this situation unless as a tip.

Then you have a likely viable operating company with an appropriate capital structure. The methodology being followed is backwards. Requiring certain debt swaps without knowing the value or debt capacity is destined for failure. Although it could go either way, if this requirement was agreed to be the UAW and the bondholders, it would most likely leave GM still overlevered and delaying the inevitable next restructuring. Further, an overlevered GM will require more government funding to pay interest that shouldn't be incurred and shouldn't be paid.

It should follow the oversimplified steps I laid out above. So far all this ignores all the other stakeholders and the government's existing debt claims, its other contingent claims (e.g., PBGC claims) and future funding requiresments. It also ignores that the government is missing from the negotiating table the past six weeks which has probably chilled the bondholders from giving up too much in this go around.

During this week, I will touch on these other items concerning GM's continuing negotiations.

Cheers, Mike

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