It appears that the June 1 deadline to present a plan to the federal government to avoid bankruptcy might be met, as it has been reported that GM and its debtholders have reached an agreement.
In order to prevent the largest corporate bankruptcy in U.S. history, General Motors was given until June 1 by the federal government to create a viable company restructuring plan. The government is highly involved with the company's dealings because of the amount of taxpayer bailout money given to the firm to remain operational.
The car maker's initial strategy discussions to avoid bankruptcy sputtered and quickly broke down. President Obama's automotive industry task force deemed the plan was simply not realistic. The most critical component of the plan deals with negotiating settlements between the company's creditors and representatives of the United Auto Workers union. Further complicating matters was that the UAW wanted to see more leeway given to GM by its creditors, as union reps argued their concessions were already more than generous.
The Treasury Department has been spearheading the talks between GM and its creditors. Despite the enormous stakes and highly complicated corporate negotiations, the agreement simply boils down to a cash settlement. The four largest GM debtholders, which are banks, will forgive $6.9 billion in debt and instead receive $2 billion in cash.
Reports are also out stating that in exchange for forgiving such large numbers, GM will offer company stock. However, analysts are not optimistic. A Reuters article stated:
"General Motors' bid to reduce debt with a bond-exchange offer is destined to fail, an analyst at credit research firm KDP Investment Advisors Inc. said.
GM on Monday provided an update on its plans to meet a June 1 U.S. deadline by targeting deep reductions in debt, labor costs and dealership network and brands to restore profits.
The company is almost certain to miss that deadline, wrote KDP analyst Kip Penniman in a research note."
The Wall Street Journal, however, reported that the exchange was agreed to by many of GM's European debtholders.
With the largest creditors partially satisfied, it is now in the hands of an additional 46 banks and hedge funds that carry GM debt. Should a number of the minority stakeholders not feel their debt will be met in the agreement, GM may very well file bankruptcy to protect itself, in which case an entirely new series of negotiations would have to begin.
The most recent announcement pertaining to the company's repair estimate involved the well-recognized and re-booted Pontiac brand. Having just experienced growth in sales thanks to its edgy and high performance G6 and G8 lines and the relaunched GTO muscle car, Pontiac is now being permanently parked.
General Motors, in all, needs to rid itself of the majority of $27 billion in unsecured debt. Should the debt for equity swap work, the world's largest producer of automobiles should remain in business.
The drama continues.