Frederick Henderson has announced a proposal directed at Government & its Bond-Holders. That GM could swap 50% of the loan-value from its Government bail-out for corporate equity, and if agreed by Washington (and the UAW given other conditions) then offer bondholders 225 shares of its common stock for every $1,000 of principal they held – reducing outstanding debt by $3bn to $24bn.
This would obviously alleviate a heavily pressured balance sheet by a reported $20bn; a seemingly agreeable notion. But given the stock-swap conditions of the UAW VEBA agreement already in place, the notion would appropriate 89% held by Government and UAW, leaving only 11% as a 'free-float'.
Although much derided by recent events, and some might have it otherwise, we still live in a Capitalist economy that relies upon the re-strengthening of financial markets and associated intermediaries and participants, and critically broad-scale investor confidence. So whilst the GM proposal could offer a mid-term respite for the company at large, it begs the question as to why it should indeed still stay a listed enterprise?
The markets reacted well to the news, but that seems to be simply yet another case of momentary irrational exuberance as event-driven traders believe that the Nanny State will take care of the company and its investors. The long-term holders of equity at least are probably more skeptical.
The truth of the matter is that present incumbent money managers, hedge funds, institutionals and 'GM loyalist' 'Mam & Pop' investors will have been heavily dismayed by the level of value destruction from the company seen in recent years and further recently exacerbated by the 'cents on the dollar' 'haircuts' that were previously mentioned. Now this Government directed debt-for-equity swap dilutes the present share-holder's standing, GM offering that all of the $27bn public debt outstanding be transferred into 10% equity.
Mutiny is an ugly prospect, one accorded more to yesteryear Captains than today's metaphorical 'Generals', but such fractious days could witness a new level of investor activism from the most conservative of quarters. An activism that surpasses the recent social activism in terms of striking at the heart of the, and maintaining the cause for the very model of capitalism; one of a variety that has not yet been seen in US economic history.
When it is highlighted that the offer must be accepted and contractually signed-off by May 26th, just 6 days before the June 1st GM deadline set by Government it looks increasingly remote as a viable proposition given the level of investor discontentment.
Frederick Henderson also re-iterated the idea that he is open to, and been working on, GM's admission to Chapter 11; hoping that his counter-parties in Government and Wall Street fear that such proceedings could indeed take years given the commercial operating complexity of GM.
Restructuring talks and plans are of course still ongoing. And as part of that is the idea that the company could formally split and set itself out under the guises of 'Good GM' (comprising of Chevy, Buick, Cadillac & GMC) vs a 'Bad GM' (ie Saturn, Pontiac, Hummer, SAAB & Opel), This possibility follows the same conjectural possibility aired previously for the US banking sector and its supposedly 'toxic' assets. Indeed their has been comment that the 'Good' could take stakes in the 'Bad' to aid restructuring possibilities and inject latter-day confidence.
[Such a 'Bad GM' would of course either divest tangible and intangible assets, be restructured under very different stakeholder conditions or merged with another enterprise able to leverage a far better cost-structures, so giving those presently poor profitability brands the opportunity for feasible turn-around and so providing latter-day value-extraction opportunities].
In the meantime additional re-sizing and cost-saving efforts continue in the form of dealership rationalisation, workforce reduction, plant closures and of course the much muted partial sale of Adam Opel AG – with FIAT SpA presently seen as a front-runner vs a supposed number of unnamed candidates.
Henderson says GM aims to operationally 'break-even' at 10m units p.a. , and that is part of the reason we suspect it has centred itself around the 4 obvious high-synergy divisions in cars and trucks. Using the March '(Jan-Mar Vehicle Delivery' statement recently issued, the US will provide for approximately 1.7m units in 2009 if present conditions do not abate, down 48.8% for the YoY period of which 40% derived from cars vs 58% from SUVs & light trucks. This basic mix demonstrates GM's lacklustre (GMDAT sourced) presence in the small and compact car segments.
As for the topical primary issue of bond-holder reaction and sentiment toward the proposed deal, most have, and will, see it as nothing but GM being seen by Government to be doing something to be pro-active, even if that something is less than realistic. For both the Detroit and Washington players must know that given fund managers' primary 'guardianship' of their investor's interests and their highly important role as 'capital market transmission mechanisms' the offer is untenable.
In the transparent game of chicken being played, those on Wall Street, in Connecticut, Massachusetts, California, Miami and elsewhere will view it as water off a duck's back; as they devise their own scenario outcomes for the auto-sector's over-haul and their own thematic and target plays.
For if GM were indeed to be taken over by Washington and the UAW that would tantamount to Nationalisation. Western economies are undoubtedly variations of the 'mixed-economy' model, but the US, as a global leader of free-trade and anti-protectionism, cannot resort to such coddling of over-ripe, matured industry structures; and the Administration more than knows it.
To do so would undermine its very standing and leave it open it to slights that GM & the USA's industrial policy had more in common with the likes of flailed state-policies such as Malaysia's Proton in Malaysia or the government-owned CIS automakers that have been operationally stagnant due.
Such accusations may over-state the case, but would anybody want 11% of such an entity in what would be effectively be in the medium term at least a planned industry? Not likely. At a time when even T-Bills are loosing attraction, a state-run car company - with its inherent undoubtedly 're-tabled' social agenda pressures – looks even less attractive.
Ultimately, the debt for equity argument is a valid one, but the retained debt vs new equity issuance mix must be a balanced equation if GM and the auto-sector is to heal and the financial markets are to function healthily.
Though the Bankruptcy Judge sits awaiting and the lengthy road of due process runs to the horizon, perhaps it is time that an independent panel of cross-discipline luminaries be appointed as the tri-party arbitor and 'macro' & 'micro' solutions seeker.?