Platinum Lending Solutions

By Ken Bensinger

12:24 PM PDT, April 27, 2009

In a desperate bid to avoid bankruptcy, General Motors Corp. today launched a restructuring plan that would eliminate 2,600 dealers, 21,000 workers, $44 billion in debt and four brands, including Pontiac — while leaving the U.S. government owning at least half of the troubled automaker.

In addition, GM will accelerate the wind-down of its Hummer, Saturn and Saab brands, ceasing production by year’s end. Pontiac will be terminated after 2010.

The automaker announced the sweeping moves as part of a revised business plan it is submitting to the Treasury Department, from which it is requesting $11.6 billion in loans on top of the $15.4 billion it has already received.

The new plan is centered on a debt-for-equity offering GM is extending to holders of $27 billion in bonds. At least 90% of holders of outstanding bonds must accept, the company said, or it will file for bankruptcy by June.

“The objective here is not to survive, the objective is to develop an operating plan that helps us win,” said Fritz Henderson, GM’s president and chief executive in a morning conference call. “It’s a difficult period, it’s a challenging period, it’s a very painful period.”

Shares in GM rose 36 cents, or 21%, to $2.05, in early trading.

This is the third restructuring plan filed by GM since December. This time, it plans to incorporate cuts sufficient to allow the company to break even in a market with industry sales as low as 10 million vehicles in the U.S. on an annual basis.

Last year, 13.2 million cars and light trucks were sold in the U.S., but through the first quarter of this year, sales were on a 9.8-million-unit pace.

Last month, the Treasury Department’s autos task force rejected GM’s previous restructuring plan, submitted on Feb. 17, saying it was insufficient in scope and reach.

Instead, GM was given until June 1 to show the Obama administration it has a sustainable business model or it would face being pushed into bankruptcy.

To do that, the automaker was asked to reduce billions of dollars in obligations to the bondholders and unions for retiree healthcare and to reduce labor costs, as well as show it can turn a profit in a market that’s seeing its lowest sales level in three decades and repay its taxpayer funded loans.

The latest plan is based on far deeper cuts for all significant stakeholders than considered before, and as such calls for far greater sacrifices in order to keep the century-old automaker afloat in its most difficult hour.

“The depth of the pain inflicted on our workers, families and communities by these decisions should not be minimized,” Sen. Carl Levin (D-Mich.) said. “It appears GM was left no choice, and I now believe bondholders have no choice either but to accept significant losses as a better alternative to bankruptcy.”

Chrysler, which has borrowed $4 billion from the government, has been given until the end of this month to reduce its debt and to cut union costs. In addition, it has been asked to forge a merger with Italian automaker Fiat.

On Sunday, Chrysler reached a deal with the United Auto Workers union and the Canadian Auto Workers union, the latter of which has been ratified and is expected to save the company about $200 million a year in labor costs.

The Chrysler union deals are likely to set a framework for any agreement that GM reaches in coming weeks.

Although GM has already reached a tentative agreement with the UAW on labor costs — which has not yet been ratified — it is still negotiating reductions in payments due to a retiree healthcare trust. At the same time, its new plan contemplates further layoffs.

GM said it would eliminate 21,000 salaried and hourly jobs by the end of next year, 7,000 more than previously announced, and would shutter 13 plants in the process. By 2010, it will sell only 34 car models, down from 48 in 2007.

With Pontiac, Hummer, Saab and Saturn slated to be eliminated, GM will focus on four brands: Chevrolet, Cadillac, GMC and Buick. The company’s plan predicts that its share of the U.S. vehicle market will drop to between 18.4% and 18.9%, from 19.5% at present, as a result of the brand reductions.

On Friday, GM said it would shut down 13 plants for up to 11 weeks this spring and summer, reducing inventories by 130,000 units, in order to meet currently depressed levels of demand. GM’s sales through the first quarter of the year are down 43% compared with a year earlier.

GM lost $30.9 billion in 2008.

A major sticking point for the company has been reducing by as much as half $20 billion in cash obligations to a retiree healthcare trust established with the UAW in 2007. The automaker said it would accomplish that goal with a debt-for-equity swap, and would also offer equity to the Treasury in exchange for up to $10 billion in debt and to private holders of $27 billion in GM bonds.

A tender offer extended by the company today to bondholders would trade 225 shares in the company for every $1,000 in debt. To avoid a bankruptcy filing, Henderson said, at least 90%, or $24 billion, of that debt would have to be voluntarily swapped.

“If the tender doesn’t work, we will file into bankruptcy,” Henderson said in a call to Wall Street analysts today.

By combining its tender offer with its equity offers to the Treasury Department and the UAW, GM hopes to cut $44 billion in debt from its balance sheet.

Analysts reacted with skepticism, suggesting that the plan provided a far weaker offer to bondholders than to the UAW.

“The offer is unlikely to be accepted,” said Brian Johnson of Barclays Capital. He calculated that the tender would be worth 0 to 5 cents per dollar of outstanding debt to bondholders, compared with 50 to 60 cents a dollar to the union. Johnson called GM’s latest plan “final brinksmanship.”

If the offer is successful, however, it would give the U.S. government at least a 50% stake in the automaker, with the union holding up to 39% and bondholders with an additional 10% share. Current shareholders would effectively be wiped out.

As such, it would effectively nationalize the automaker.

GM’s Henderson did not give details on how it would be managed in that scenario, but said that the “administration is not interested in running GM.”

He did say, however, that the autos task force insisted on the specific ownership percentages to different stakeholders, and that it also asked GM to replace the majority of members of its board of directors. Both are strong indicators of how deeply involved the administration has been in the automaker’s planning to date.

Meanwhile, GM said it would soon begin contacting the approximately 2,600 dealers it has selected for elimination and make them undisclosed offers to surrender their GM franchises. That could cost billions of dollars, although Henderson declined to give specifics of the offer.

The cuts would leave GM with about 3,600 U.S. dealers by 2011, a 42% reduction. The closings would leave 500 fewer GM dealers than had been contemplated in the company’s previous restructuring plan.

A big part of that reduction would be eliminating Pontiac, which GM today added to the list of targeted brands. Hummer, Saab and Saturn were already slated for closure. Henderson said that production of all four brands would cease by 2010, although a few Pontiac models could be extended for another year.

Henderson said that several parties continued to show interest in Hummer and that “our gut judgment is we do have a reasonable chance there will be a sale of the brand.” He was less certain about Saab and Saturn.

Though an Oklahoma City-based private investment firm approached GM about purchasing Saturn two weeks ago, Henderson said that an offer sweet enough to keep Saturn vehicles in production beyond this year was not “on the table, at least one we would consider successful.”

The company plans “discussions” with Toyota Motor Corp. over the fate of the Fremont, Calif., plant they operate together to produce the Pontiac Vibe and Toyota Matrix. Henderson said the Vibe would continue production through 2010.

GM is also in discussions with potential investors in its European Opel division, including the possibility of giving up a majority stake in the unit.

“It’s been my theory that big is only good if you use it to your advantage,” said Henderson. “As a company, our overall performance has not been adequate.”