Tim O'Brien | May 28, 2009

GM US HAS OVERNIGHT moved one step closer to bankruptcy following the rejection of a debt for equity offer by GM to its bondholders (the banks and institutions holding US$27.2 billion in GM debt securities).

Chapter 11 bankruptcy protection for GM is now all-but certain; perhaps as early as tomorrow. Of such a size and scale, it will be a history-making moment.

How it is handled by the company, by the powerful United Auto Workers union (UAW), and the Obama Administration will likely define the future of the US as an auto-making powerhouse for decades to come.

While restructuring may be easier under Chapter 11, whether GM’s new majority owners - the US Government and the union (and better include taxpayers in there) - can work with the GM Board to make the hard decisions to return the company to profitability, is far from certain.

Tellingly in these times, GM last Friday reached agreement with the UAW on payment terms for the $20 billion owed by GM to the Voluntary Employee Beneficiary Association (a health care trust fund for GM retirees), as well as on redundancy packages (worker ‘buyouts’) for GM’s ‘overweight’ workforce.

Among the terms, the union is reported to have agreed to take 17.5 percent of common stock in a restructured GM, plus $6.5 billion in preference shares and a $2.5 billion note to be paid out between 2013 and 2017.

The automaker will also put $10 billion into the VEBA trust fund, half of the $20 billion reportedly owed.

The worker buyouts are also a key part of the negotiated agreement. GM is aiming to cut its US workforce from 61,000 to 40,000. It hopes to speed things along with a “cash and car-voucher” inducement to encourage workers to retire.

Under the agreed strategy, GM is offering up to US$115,000 plus a US$20,000 voucher toward a new GM car for workers with 20 years or more service, scaling down for those with less years of service.

Agreement with the union on job-shedding is seen by the Obama Administration as an important step in restructuring GM for profitability.

But the bondholders have been tougher nuts to crack.

GM had offered them an equity for debt swap, offering them 10 percent equity in the restructured company – a proposal that has been widely criticised as “inadequate”. The bondholders are holding out, an action that will likely force the hand of the US Government in tipping GM into Chapter 11 bankruptcy protection.

With no agreement with bondholders, GM will likely seek bankruptcy protection before the June 1 Government deadline for restructure, just days away. We could get an announcement any time, perhaps as early as tomorrow Australian time.

US component suppliers, who have been identified as needing US$8 billion in aid as a result of the collapse of the US market and the dire troubles of its ‘big three’, can do little but wait.

holden-commodore

So too can GM’s subsidiary brands such as Holden, Vauxhall, Saab and Opel.

News from Germany however is that GM is near to finalising the sale of Opel, with German Government support, and with Fiat emerging as the front-runner.

The German Government of Chancellor Angela Merkel has an election approaching. The last thing it wants is the collapse of GM Opel and the loss of tens of thousands of production-line jobs.

Government Economy Minister Karl-Theodor zu Guttenberg met with Fiat CEO Sergio Marchionne in Berlin after which he told reporters that Fiat’s offer and its plan to create a transatlantic car empire that would also include Chrysler, “looked serious”. Fiat had also reportedly committed to retaining jobs and GM Opel plants.

Others bidding for Opel are Magna, RHJ International and China's Beijing Automotive Industry Corp (BAIC).

An announcement on GM Opel can also be expected before the June 1 deadline.

That leaves just a day or two before the automotive world as we’ve known it for decades is about to be turned on its head.