George S. May Business Blog

Debt-holders may get the short end of the stick as GM plans to cut jobs and shed Pontiac

The federal government laid out a massive restructuring plan Monday that will slash around 21,000 U.S. factory jobs, 16 plants and 3,600 dealers from General Motors’ workforce on its way to phasing out the Pontiac brand.

The plan offers a trade of around $27 billion in bond debt for GM stock and looks to leave current shareholders with just 1 percent of the company. On the other hand, GM is offering stock to the United Auto Workers for at least 50 percent of the $20 billion the company must pay into a union run trust that will take over retiree health care expenses starting next year.

If I was a debt-holder I would be absolutely stunned. Think about it like this: GM owes creditors $27 billion and in turn, offers them 10% of the company. Then GM turns around and tries to give the UAW a larger stake in the company even though GM owes them less money.

My fist reaction was to blame it on the UAW. You know, the classic – The UAW has too much control. While we absolutely understand that the union was created, and is still in place for that matter, to protect the hard-working middle class American, the problem now is that they are hurting the rest of the working class across the nation. The UAW has far too much power over the car maker and as a result GM will never be able to restructure their company to create the same profit margin as foreign car factories in the US.

But then I saw an interview with Fritz Henderson, where his response to the whole, ‘why are the debt-holders getting screwed over in this proposed deal’ question was: [paraphrase] this is no longer about what is fair or not. This is bout the comfort range of the Treasury Department.

In other words, he claims that this number was set by the Treasury Department and they won’t allow debt-holders to get any more than 10%. Regardless, this deal should be dead on arrival from the perspective of the creditors. I find it hard to see how a deal this lopsided would ever go through.

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