GM Bankruptcy Part I: A Bright Future Awaits

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Tag: GM, General Motors, Ford, Chrysler, Bankruptcy, Chapter 11 

June 4, 2009

For the better part of a year now I have been focusing my attention on the crisis in the US auto industry.  In an article written last June (months before the collapse of the financial sector), I documented my near term forecast for the Detroit 3 auto companies: Ford, Chrysler and General Motors.  At the time my primary concern was specifically GM and Chrysler needed cash.  Easy credit had dried up and both companies were at risk.  I expected there was a very likely chance one or both would seek government aid. 

In June 2008 I stated (See GM, Ford and Chrysler Near the Brink of Collapse?):

Three short years later the bottom has fallen out of the industry and I believe that Chrysler and GM might be headed into the hands of creditors without drastic action. Ford only by shear luck of raising cash when they did put them in a better position today. My thoughts on Chrysler’s future are well document. However I have been very quiet on both GM and Ford. That is until I fully digested May’s sales results, $140+ barrel of oil, the bleak outlook for the US economy and lack of liquidity in the credit markets. The housing collapse in the US most likely has not hit its nadir and the banks have not fully resolved their books. The automakers may have a very difficult time raising capital to sustain them while the market works itself out. All of this assumes there will not be a Bear Sterns like government bail out of one or two of the Detroit three.

Without coverning old ground, Ford continues to skate by on money raised when the company mortgaged everything in late 2006.  The company did what it had to do to protect the interest of the Ford family at the expense of extensive debt.  However, in the past 6-months, the company has made progress in restructuring its balance sheet and raised cash.  Ford also has reached agreements with the union and debt holders to convert debt-to-equity and has also raised cash through the use of stock.  For example the company retired $9.9 billion in debt.  Its total outstanding debt is now $15.9 billion.  The company will also fund half of its UAW healthcare liability with company stock instead of cash (Press release). Ford also raised $1.4 billion through a 300 million share offering. Just over a month ago Chrysler filed for bankruptcy protection and it appears ready to emerge partially owned by Fiat, the US Treasury and the UAW VEBA Trust.  Finally on June 1, 2009, GM formally filed for Chapter 11 bankruptcy protection in New York.  

The news of GM filing for bankruptcy protection was expected and the only way to quickly and legally make the restructuring changes to the company that have been necessary for a very long time.  According to documents filed with the court the company said it has $172.8 billion in debt and $82.2 billion in assets.  As part of the bankruptcy the US Treasury will provide $30 billion of financial support in addition to the $19 billion it has already received.  With the full backing of the US Treasury to provide the financial support to recapitalize the company, the Chapter 11 reorganization at this time was the only way to prevent liquidation of the company’s assets.  Bankruptcy protection was not an option late fall of 2008, as there were no guarantees GM could line up the necessary financing.  

According to GM President, CEO Fritz Henderson’s affidavit to the bankruptcy court:

In the wake of this increasing competitive pressure, for approximately the past five years, GM has been engaged in an effort to realign its business operations and practices to: (i) improve the consumer appeal, quality, safety, and fuel efficiency of its cars and trucks; (ii) achieve cost competitiveness and advantages in labor, manufacturing, product development, procurement, and staff functions; and (iii) address GM’s huge legacy cost burden (which has cost GM $103 billion in value over the last fifteen years). For example, beginning in 2005, GM initiated and accomplished, among other things, a reduction of its North American annual structural costs by approximately $9 billion, a considerable reduction of its North American capacity and its hourly and salaried workforce, and a modification of its collective bargaining agreements with various labor unions, significantly reducing its OPEB obligations.

...

The 363 Transaction is the only remaining alternative to save the Company’s operations and prevent the immediate liquidation of GM and the catastrophic impact on the economy that will result from the loss of hundreds of thousands of jobs if the GM assets and business are not sold and transferred as proposed. No other potential buyer of GM’s business has come forward. No entity other than the U.S. Government has the wherewithal to provide the billions of dollars needed for DIP financing and the financing of New GM.

The plan is for the federal government to take a 60% ownership stake in the new GM. The Canadian government, the UAW healthcare trust and unsecured bondholders would take 12.5%, 17.5% and 10% respectively. It is expected current shareholders will receive no equity in the new company. Without the US government's backing, GM would have had to enter into a traditional bankruptcy, which could have taken years instead of petitioning the court to utilize the section 363 “quick rinse” bankruptcy process.  It is anticipate GM will emerge from bankruptcy in the next 60 - 60 days. 

GM has been receiving Federal assistance for five months now and has worked with stakeholders (union, dealers, suppliers and bond holder) to reach agreement prior to entering bankruptcy.  For that reason I do not see New GM not emerging from the court's protection in a sort periord of time.  Chrysler entered bankruptcy a little over a month ago and could emerge under new ownership next week.  In addition the general auto market being depressed such that when GM filed there is a good chance the company will not lose a large number of sales due to the perception of uncertainty in buying their product.  At this time, it can also be assumed that consumers are well aware of what is going on even if some may not understand the Chapter 11 process. The company has also resolved their funding problems with Opel and appear to have a buyer for HUMMER.

I also believe GM’s latest restructuring plan will result in a very successful company when it is fully implemented.  For starters, the company should have a balance sheet and breakeven pointed structured for a 10 million vehicle US market and with GM having about an 18% market share.  I find both very conservative.  The market conditions appear to have stabilize and the company has been improving its market share over the past couple months (See 2009 US Auto Sales May Have Reached Bottom - Slow Recovery Expected).  The seasonally adjusted sales rate in May was 9.9 million vehicles.  More importantly for the past two months GM's sales declines have been less than the industry average.  In May GM’s sales dropped 28.7% over the previous year compared to 33.7% for the industry.  More importantly Honda, Nissan and Toyota reported greater sales drops by 41.5%, 33.1% and 40.7% respectively.

As part of Monday’s filing, GM announced that it would expedite the closure of four general assembly plants.  The plants include facilities in Pontiac, MI (fullsize pickup trucks), Wilmington (Pontiac, Saturn sports cars), Orion, MI (Malibu, G6) and Spring Hill, TN, (Traverse).  

At the June 1st press conference Fritz Henderson said:

Okay. Employment in the U.S. would be -- as we get into 2010, around 40,000 hourly employees, that's in our plans, and about 23,000 salaried employees. Our North America business is obviously larger and a lot of our U.S. people by the way support our total American business and our global business. That gives you a sense of U.S. employment. Production capacity in the U.S., two shifts, straight time, about 2.3 million units. If I remember correctly. It's basically somewhere between 2 and 2.5 million units. Being short of capacity is not my worry, because in fact, we can actually put our plants on to three shifts, and actually reach for significantly higher levels of demand if it's required. In 2010, we'll have to see what the market gives us. Thank you.

Of importance is the fact GM's only mothballed the Orion and Spring Hill assembly plants and will be in a great position to regain sales volume once the economy gains some traction.  The Chevrolet Traverse production in Spring Hill will be moved to a plant in MI.  GM also announced US production of a new small car that is rumored to be put into the Spring Hill assembly.  To affirm what Henderson stated, GM will have sufficient production capacity to grow the business as market conditions improve.

This will be of significant because GM has a substantial pipeline of product to be released in the next 12 to 18 months.  As Henderson reiterated many times during his press conference, GM’s future success depends on the product and GM’s pipeline is loaded with a nice balance of cars, trucks and crossovers.  Looking at May’s sales figures, crossover vehicles were only down 19.1% and are still a relatively hot segment.  The company will be release three new substantially improved volume entries into that segment of the market in the new few months (Cadillac SRX, Chevrolet Equinox and GMC Terrain).   That is just a small sampling of what the company has in the works (See Upcoming GM Product May Save the Company).  If they are executed to the same standards as other vehicles released over the past couple years, they have the potential to be very successful products.  It must be understood that GM had strong product plans in place because the intent was to grow the business to clean up its balance sheet without having to resort to bankruptcy.  Those product plans for the most part are still in place but now include additional small car programs. 

 

 2009 Cadillac Converj Concept

With GM in bankruptcy the possibility does exist something can go wrong and the initial plan may fall apart.  However I think that is unlikely because of the US government's backing and support.  For that reason I am bullish on New GM emerging from court protection quickly and with the right plan in place.  I am more bullish of the fact GM has a strong leadership team that has been and continues to be highly focused on delivering world class product.  This is not something GM's culture needs to learn but needs to continue to execute.  More importantly GM's product development portfolio is full of product that will be released to the market in the next 12-18 months. 

To be successful in this business the company must have the right product and I believe it does.  I also expect both the US and Canadian governments and the UAW VEBA Trust to liquidate their position within the next 2-3 years once the economic climate settles.  GM will have the product and resources to be able to stabilize and begin to grow the business and I do not expect the ownership structure to meddle in the day to day running of the business.  Furthermore, I also estimate a reasonable market capitalization for the company of between $40 and $70 billion when an IPO is issued.  If that holds true, the government and union should recover all or a significant portion of their contributions to the new company.  As for the unsecured bondholder, well they are long term investors and if GM continues to grow, they also could recover a significant portion of their initial investment over the next 15 - 20 years.

 

Resources:

GM Bankruptcy Docket

GM Statement on U.S. Treasury's 363 Sale Proposal

Newly Ratified GM-UAW 2007 National Labor Agreement Modifications Eliminate Competitive Gap for GM

GM Announces U.S. Treasury 'Satisfied' with Bondholder Support

GM 363 Sale Proposal announced in a Form 8-K filing on May 28, 2009

Transcript: Fritz Henderson Press Conference, June 1, 2009

Tengzhong In Advanced Talks To Purchase HUMMER From GM In Strategic Acquisition

GM Comment re: Delphi Agreements to Emerge From Chapter 11 Reorganization

GM Files Supplemental Exchange Offer Prospectus

GM Pulls Ahead U.S. Plant Closures; Reaffirms Intent to Build Future Small Car in U.S.

GM CEO Affidavit

GM Bankruptcy Petition


 

 

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