Zoomi Life

General Motors‘ bondholders rejected a debt-for-equity swap and so have set into motion the likely bankrupting of GM.  This could be the largest industrial bankruptcy in American history.  GM has until the end of the month to convince government officials that it’s solvent, but with over $100 billion in red ink, it’s not likely to happen.

GM needed about 90% of their bondholders to agree to the swap.  They didn’t even get close.  This leaves GM facing bankruptcy and restructuring.  A new deal, however, has been sweetened by the government and approved by those bondholders which will allow for a pre-packaged, “fast track” bankruptcy similar to Chrysler’s.

It appears that GM’s biggest mistake was offering less to bondholders (who hold the corporation in higher debt–$27 billion worth) than they offered to United Auto Workers. This tactical mistake is probably what doomed them to bankruptcy.  The Union is betting most of its retirement health-care fund on ownership of 17.5% of GM.  That for $20 billion in funds from GM’s future obligations to the health-care fund.

So once this bankruptcy happens, what will GM look like?

The New York Times reports that unnamed sources are saying that the total bailout (in worth) from the U.S. government once the Chapter 11 is done will be about $50 billion.  In return, the U.S. Treasury could gain ownership of about 70% of GM.

Ad to that the 17.5% the UAW owns and there’s only 12.5% left for the bondholders.  The Times report says that bondholders would actually only get 10% of the company.

So far, GM has received $19.4 billion in Treasury funds and would stand to receive another $50 billion during restructuring.

So the new GM would appear to be emerging from Chapter 11 as a government-owned corporation with a large controlling share being held by the auto worker’s union.  Does anyone else see GM being better off because of this?  What about the auto industry as a whole?

I sure don’t.

On the up-side, there probably would be an end to UAW strikes, since it’s their bottom line now that’s hurt when they stop working.

As a side note, Andrew Ross at the San Francisco Gate observes that Tesla’s current valuation is about $550 million, which is about 1/2 of GM’s current market valuation of $1.17 billion.  Meaning upstart Tesla Motors is now half the size (in worth) of old timer General Motors. Hmm…

Sources: Reuters