Auto industry analysts said Monday, the day before a government deadline for GM to turn in a plan for viability, that UAW needs to broker concessions on par with those already given to GM by its bondholders. The bondholders mostly consist of pension and retirement accounts held in mutual funds, and therefore UAW needs to “share the pain” and agree to allow GM to swap cash payments into its healthcare trust for GM stock, according to analysts.
The government has mandated that GM restructure two-thirds of its $28 billion in unsecured debt before further bailout funds are given. Insiders familiar with the ongoing negotiations said that talks with the UAW and bondholders made progress on Monday; a detailed agreement is not expected (and not required) to be reached by the Tuesday preliminary report deadline. The smaller Chrysler was also locked into last-minute negotiations with the UAW, talks that were proceeding, like GM’s, after the UAW stormed out of talks over the weekend.
Glenn Reynolds, CEO of a research firm in New York City, said of the debts: “The bondholders have to be very guarded about being used as the swing factor in the restructuring. It has to be equal with the UAW’s contributions.”
Reuters reports:
“Reynolds described the bondholders as mostly pension funds, mutual funds, insurance policy holders, retirement savings plans and other investors, many of whom helped to fund GM’s pensions. Wall Street or vulture investors make up a distinct minority, he said.
“The sense by some that there has been an absence of fair play for bondholders clearly has been a problem to date,” he said. “In the end, it may play to the pro-Chapter 11 crowd.”
JPMorganChase, which is one of the debtors to both GM and Chrysler itself, released a report last week predicting that debtholders would receive 50 cents per dollar of debt with government subsidies; this is a relatively high rate of return for bond markets right now. JP Morgan also predicted that funds holding the bonds would be less likely to concede if they weren’t treated equally with the UAW. Their report recommended that the government provide 10 cents on the dollar and issue new notes for 40 cents on the dollar, and they concluded that GM could again become profitable by 2010 if these measures were taken.
Reynolds, who previously served as head of global corporate bond research at Deutsche Bank and was a managing director of fixed-income research at Lehman Brothers, said the union had not been unfairly singled out in the process.
Shareholders have been wiped out essentially, the majority of bondholders will be permanently and materially impaired and salaried workers and retirees have been “slaughtered,” he said. Suppliers also have taken massive losses, he added.
“For bondholders, they will not get a fresh bite at the apple in a few years — unlike the UAW via collective bargaining,” Reynolds said. “The bondholders will crystallize their losses.”
UPDATE: The New York Times reports that GM and UAW are stalled on the issue of healthcare for retirees as GM prepares to submit a 100-page report that details the largest restructuring plan in General Motors history. UAW expects GM to cover costs for $5 billion in healthcare a year, despite GM losing $20 billion last year.
Meanwhile, Chrysler executives were meeting with 80% owners Cerberus Capital Management on Monday to supervise the contents of Chrysler’s own restructuring plan.