The GM "Total Confidence Plan" isn't persuading secured debtholders who'd rather cash out.
General Motors has just confirmed that it will draw an additional $2 billion in U.S. Treasury loans to maintain adequate liquidity, as the company continues tense negotiations with bondholders and unions about the concessions needed to revise its business plan.
President Obama’s Auto Task Force rejected GM’s February submission last month as “not viable” because it didn’t clean up its balance sheet enough and gave GM until June 1 to come up with a better plan, less encumbered with fixed costs and debt.
The latest bridge loan means taxpayers have now lent GM $15.4 billion, a relatively small – some say paltry — sum compared to the hundreds upon hundreds of billions given to the financial institutions that are the root cause of the current global Great Recession.
While the need for the additional funding of $2.6 billion was contained in GM’s February “viability report” to the U.S. Treasury, Fritz Henderson, GM’s CEO, in his last press conference a week ago, was non-committal about GM’s need for more cash. In March, the company surprised everyone by not taking a projected $2.3 billion loan, saying that its cost cutting and cash flow were better than expected. Considering the timetable facing Chrysler whose deadline is next week, Henderson said, “I would expect (GM) could pick up the pace in the next couple weeks.”
Perhaps the timing is coincidental, but just yesterday GM announced drastic production cutbacks and layoffs, ranging from one to nine weeks, for virtually all of its North American manufacturing plants. Since auto companies book the revenue on vehicles when they leave the plant gate on their way to dealers, production cuts automatically equate to lost revenue.
The announcements yesterday were a bitter foretaste of what a GM bankruptcy will look like. So the closings no doubt garnered the attention of state and national politicians, as media reports and TV coverage described or showed the dire consequences of shutting down so many plants. Thousand of suppliers will also be negatively affected.
In a statement GM said: “We appreciate President Obama’s and his Administration’s ongoing support of GM and the domestic U.S. auto industry as we undertake the difficult but necessary actions to reinvent our company. We will continue to work closely with members of the President’s Auto Task Force throughout our reinvention and together we will continue to monitor our liquidity needs during this period.”
There are two key issues that appear to be inhibiting GM’s effort to provide the Auto Task Force with a viable plan for recovery. The United Autoworkers Union is being asked to reduce the $20 billion in cash previously promised by GM for its Voluntary Employee Benefits Association health care fund in return for what is currently almost worthless GM stock. A more acute problem appears to corporate bondholders or secured debt holders who are being asked to trade virtually all of their $27 billion in debt for equity in a new GM. An unkown number of these bondholders are speculators who bought the debt at deeply discounted prices. In addition, banks and hedge funds that have already received billions of dollars in taxpayer loans hold the secured debt.
One thing is certain, ongoing mass media speculation about GM’s future and what brands might or might not survive is hurting sales. In the latest media-fueled frenzy about its future, GM has just issued a statement about speculation that Pontiac will be eliminated.
“Contrary to media speculation, General Motors has not announced any changes to its long-term viability plan or to the future status of any of its brands. GM is continuing to review its restructuring plan to go further and faster and best ensure its future success. Additional information will be released as any decisions are finalized, the beleaguered company said.
General Motors has sold off all of its common stock in its employee benefit plans. As of late yesterday according to an SEC filing, it will no longer have any investments in GM common stock and will be fully invested in short-term fixed-income investments and money market instruments. The SEC filing is below:
April 24, 2009
Important Information about the GM Common Stock Fund
Concerning Two Employee Benefit Plans
This notice is to participants in the General Motors Savings Plans (the “Plans”) [Savings-Stock Purchase Program (S-SPP) and the Personal Savings Plan (PSP)] that are invested in the General Motors $1- 2/3 Par Value Common Stock Fund (the “GM Common Stock Fund” or the “Fund”). State Street Bank and Trust Company (“State Street”) serves as the investment manager and independent fiduciary of the GM Common Stock Fund. In this role, State Street is specifically authorized to sell shares of GM common stock held in the GM Common Stock Fund if it determines that (A) there is a serious question concerning General Motors Corporation’s (“GM” or the “Company”) short–term viability as a going concern without resorting to bankruptcy proceedings; OR (B) there is no possibility in the short-term of recouping any substantial proceeds from the sale of stock in bankruptcy proceedings. State Street made the determination that this standard had been met due to the economic climate and the circumstances surrounding GM’s business.
Accordingly, based on State Street’s determination, on March 31, 2009 State Street commenced a selling program pursuant to which it started selling the shares of GM common stock held in the GM Common Stock Fund, and started investing the proceeds of such sales in short-term fixed-income investments and money market instruments. The daily unit value of the GM Common Stock Fund has at all times reflected the value of these underlying investments. The selling program is expected to be substantially completed today, April 24, 2009, and at such time as it is completed, Accordingly, the Fund is no longer pursuing its stated investment strategy, and its returns are no longer correlated to the performance of GM common stock. The ability to effect an in-kind withdrawal was suspended as of the end of the business day on April 23, 2009.
As noted, upon completion of the selling program, the only remaining assets in the GM Common Stock Fund will be cash and cash equivalents. On May 29, 2009, the GM Common Stock Fund will be discontinued and removed as an investment option from the GM Savings Plans. Therefore, participants are encouraged to exchange their remaining balances in the Fund into other Plan investment options before the close of business on May 29, 2009. For participants who do not make such an election as of the close of business on May 29, 2009, any remaining balances in the Fund will be exchanged into the Qualified Default Investment Alternatives for the respective Plans, the Pyramis Strategic Balanced Commingled Pool investment option for the affected S-SPP participants and the Pyramis Active Lifecycle Commingled Pool investment option with a target retirement date (as specified in the Pool’s name) closest to the year that the participant will attain the age of 65 for the affected PSP participants.
As investment manager, State Street does not accept direct inquiries from participants.
If you have any questions regarding this notice, please contact the GM Benefits & Services Center at 1-800-489-4646.
General Motors Corporation
I hold 3500 shares of GM in the PSP.I have ridden the price down from 30.00 a share,believing it was safe and GM would return to profitability.Now they pull the rug out from under my retirement.
I hope they have a place for me and my disabled wife to live once i lose my home.
Fed up with American Corporations
I Love my country,but fear my Government!
Sorry to hear what’s happened, Paul. I am just glad that I cannot invest in the auto industry, due to ethics policies that, for once, kept me from completely wiping out my own financial portfolio.
I must, however, disagree totally with your summation. While I can see reason to worry about government, I would actually suggest that if you come out with a dime from your stock, you’re still 10 cents ahead. Believe it; GM would have gone under without a bailout, and that would’ve wiped you out entirely. Even if it went with its original viability plan, the long-term outlook wasn’t very good, so you would’ve watched the price continue to fall…just for a little longer.
I hope anyone holding Big Three shares will ultimately recover some value. But at least, for the moment, it’s starting to look like there will be a domestic auto industry. I was seriously doubting that, just days ago. That is something to celebrate, rather than fear.
Paul A. Eisenstein
Bureau Chief, TheDetroitBureau.com