GM fact sheet

After weeks of negotiations between the US administration, bond-holders and the United Auto Workers (UAW), General Motors, the largest automaker in the US, filed for Chapter 11 bankruptcy.

The administration’s plans are for a quick sale process that would see the company split in two. A leaner ‘new GM’ is expected to emerge from bankruptcy in 60–90 days, while ‘old GM’ will remain under court protection with a set of assets that will eventually be liquidated.

The current plan for the restructuring of a ‘new GM’ includes: US$30bn from the US administration, in return for a 60% equity stake in ‘new GM’, as well as roughly US$8.8bn in debt and preferred stock; US$9.5bn from the governments of Canada and Ontario, in return for a 12% equity stake in ‘new GM’, and US$1.7bn in debt and preferred stock; a 17.5% stake in ‘new GM’ provided to a Voluntary Employee Beneficiary Association trust (VEBA) that provides healthcare benefits for UAW retirees; and a debt-for-equity swap for existing GM bondholders, providing 10% of equity in ‘new GM’.

While this plan could be rejected in the bankruptcy courts, this is highly unlikely. Especially given that the administration has stated that its US$30bn in financing is conditional on the transaction being approved by 10 July.

As part of its restructuring plans GM intends to close 11 US facilities and idle another 3 plants. This is expected to impact between 18,000 and 20,000 UAW workers and should delay the pace of recovery in the US economy.

The collapse in auto sales during 2008 wiped almost 5% off retail sales for the year. And while such a severe decline in demand is unlikely to be repeated, the closure or GM plants, coupled with the existing temporary closure of Chrysler plants, could wipe a further 0.5% from industrial production.

But the impact could have been much worse. A proportion of the government’s contribution will be used to ensure that the company can still pay employee wages during the bankruptcy process. GM is also likely to seek authority to continue to pay suppliers, as well as honour existing warranties and dealer incentives.

Indeed, with domestic auto production running at nearly 5 million units annually, and sales at over 9 million units, a sharp rebound in auto production is expected, even if it is delayed.

And the GM that emerges from bankruptcy will likely be considerably more competitive, with profitability able to be sustained with US auto sales running at 10 million units. This is only slightly above current demand, and compares to a minimum profitability level of 16 million units prior to restructuring.

Yet the key is that while GM’s bankruptcy may delay recovery, the orderly manner in which it will occur will ensure that the recovery is not derailed. With new manufacturing orders now running considerably above output levels, a sharp bounce in production is expected in the next few quarters as the inventory cycle turns.