Tuesday, May 26, 2009


The press has covered the UAW agreement with GM. The press has covered the GM bondholders non-agreement with GM. The press has covered the billions that the Treasury has advanced to GM. But where has the press covered how the Treasury will recover its billions from GM?

CNBC reports that Treasury advanced another $4 billion to GM last week to bring the total to $19.4 billion. Further it reports that GM projects the total will be up to $27 billion before year-end. So now, how does the Treasury get the money back?

First a couple of table setting items. Usually the lenders of last resort receive sufficient collateral and interest and fees to extend loans prior to a bankruptcy filing. I haven't seen a word on the terms and conditions of the Treasury's advances. Further, it is unusual for a company contemplating a bankruptcy filing to borrow large amounts to pay unsecured trade creditors a couple of weeks before the possible filing in absence of a like deal with its various stakeholders. Finally, post-filing advances from the Treasury should be treated as DIP lender advances and should be repaid upon exit from bankruptcy.

So the bondholders are complaining that the UAW with $20 billion of unsecured claims is receiving $10 billion of debt and 35% of the equity for the remaining $10 billion claim while they receive only 10% of the equity for their $27 billion unsecured claim. Obviously that makes no sense on its face. (See Ben Stein's article). Further, reading between the lines, unsecured trade creditors are being paid in full in the ordinary course of business. The Treasury may be receiving 55% of the equity for its total claim of $20 to $27 billion so far. It remains to seen if the Treasury will receive debt for any of its claim. And remember, the Treasury claim should really be senior to all unsecured creditors as lender of last resort.

In summary, the Treasury, which should be senior to the UAW in part or in whole may receive 1% of equity for every $375 - $500 million of its claim (55% for $20-27 billion). The bondholders may receive 1% of equity for every $2.7 billion of its claim (10% for $27 billion). The UAW has agreed to receive 1% of equity for every $285 million (35% for $10 billion) and a 100% recovery in debt for its remaining $10 billion claim. The UAW is receiving a multiple of what the Treasury is receiving and the UAW should be junior to the Treasury is some material respect. And, of course the UAW is receiving a recovery much greater than the bondholders who are pari passu.

So, why is the Treasury receiving much less than the UAW when it should be receiving more? And are all the unsecured trade creditors being treated better than the Treasury? And what is the value of the equity the Treasury is receiving? It seems the Treasury should be receiving 50% of its claim in debt and not the UAW. Perhaps we will hear soon how the Treasury recovers its advances.

Cheers, Mike

No comments:

Post a Comment