Wednesday, April 1, 2009


As I had written in February, the legitimate threat of a bankruptcy that is endorsed by the government and the company is a requirement to getting a restructuring done outside of bankruptcy. Here is how it works.

Various stakeholders, especially the bondholders and bank lenders, have been assuming that the the bankruptcy of GM is unacceptable to President Obama and to then GM CEO Rick Wagoner. If the lenders believe that, then they would conclude, and obviously did conclude, that they could hold out for a better deal than GM was offering them. In fact the bondholders were looking to reduce their debt to 50% rather than to the 33% that the Bush Administration mandated. Wagoner played right into the bondholders hands by publicly stating that a chapter 11 filing would be the death of the company.

GM's ONLY bargaining chip is the likely treatment of the bondholders in a bankruptcy. The company must demonstrate that bankruptcy is an acceptable, albeit not preferred, alternative. The company must then demonstrate what happens to the bondholders in a GM bankruptcy. For illustrative purposes only, the threatened treatment of the bondholders might be something like this. GM could show that the debt capacity of GM is very low and that instead of the bondholders getting the 50% they want, or the 33% first offered, they would get a maximum of 10%. In fact, if I was the CEO, I would tell the bondholders that the most likely case would be that they would get no debt and only equity in a much smaller GM that they would have to share with other stakeholders like the UAW and its legacy liabilities.

I would also tell the bondholders and other lenders that marketplace uncertainties require virtually no debt so that GM can withstand further deterioration in volume and in pricing. And so that GM can have to time required to restructure its operations and product offerings. I think this is what the new CEO is doing and it is the right thing. It is just another reason, an important reason, why Wagoner had to go away. No one would believe him if he said the a chapter 11 filing was now 'ok'.

Here is an opinion piece from the WSJ with another take on the bankruptcy threat.

Cheers, Mike

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