General Motors (GM) unveiled its new turnaround plan today, after the company’s less aggressive viability plan was shot down by the Auto Task Force in February. Admittedly, this plan is much more realistic about what the company needs to do in order to become a viable entity. The most important feature of the plan is a debt restructuring that will offer $27 billion worth of bondholders 225 GM common shares for each $1,000 in principle exchanged. GM will need about 90% of its bondholders to accept this deal in order to avoid chapter 11 bankruptcy according to the statement. There is no question that this is a tall order, especially considering GM shares are trading right around $2 today, meaning bondholders will not be made whole unless the company survives long enough for the share price to more than double.
Furthermore, by converting to a common shareholder you must believe that the new-look GM will be able to survive. As I am sure the bondholders realize, if GM does eventually go bankrupt it is much better to be a bondholder than a shareholder. At least as a holder of GM debt, in a worst case scenario, you will have a claim on some of GM’s not-insignificant assets. This is an extremely interesting proposition, as GM is telling their bondholders its really their decision: Chapter 11 bankruptcy or try out the new viability plan.
Of course, this is just one feature of the new plan which includes substantial job cuts, dealership network reorganization, shedding the Pontiac brand, and oh yeah, another $11.6 billion loan from the government. If the plan is approved and put into action, the U.S. government would own a majority stake in the struggling automaker. GM’s negotiations with the United Auto Workers union continue to be unresolved, but developments on that front could arrive any day.
GM stock is up by more than 20% as the tougher restructuring effort has elicited some excitement. However, not everyone is convinced the plan adds up, from Douglas McIntyre at 247wallst.com:
“On news that GM (GM) has put together a new and very aggressive restructuring program, its shares are higher by 22% to $2.07, which gives the company a market cap of $1.28 billion. With the large amounts of equity that GM is offering in exchange for $27 billion in debt from creditors, for part of its financial obligation to the Treasury, and for money it owes the UAW pension plan, current common shareholders will end up with 1% of the company.
That would value the firm at about $130 billion after all of the transactions are done, based on the stock price of GM today.
With Toyota’s (TM) market value at $138 billion, the GM number is a bit of a stretch.”
The calculations of Mr. McIntyre are all academic at this point, it comes down to whether the bondholders believe that this plan is the way forward. We are anxious to see what the approval rate is on this plan, at least we know that GM is realistic about what needs to happen. All of this is for nothing though if GM cannot find a way to sell more cars.