Auto Workers Pivotal to GM Said to Trump Bondholders (Update2)
By Jeff Green and Caroline Salas
April 15 (Bloomberg) -- A United Auto Workers union retiree health-care fund probably
will get preferential treatment over other unsecured claims in a General Motors Corp.
bankruptcy or restructuring, people familiar with the plans said.
GM needs a cooperative union to build its vehicles once it reorganizes, giving workers
more leverage than other claimants, said the people, who asked not to be identified
because plans aren’t set. GM is seeking cuts in labor costs and debt to keep $13.4 billion
in U.S. loans and win more aid.
“The bondholders are getting excoriated in the press as the evil people that are holding up
the process,” said Evan Flaschen, chairman of the financial restructuring group at
Bracewell & Giuliani LLP in New York, who isn’t involved in the case. “It’s easy to cast
them in a bad light versus the employees you need to run the business going forward.”
At stake is the future of $20.4 billion in health-care obligations for about 522,000 GM
workers, retirees and dependents and $27.5 billion in unsecured claims from thousands of
bondholders including institutional investors such as university endowments, insurers and
The Obama administration said last month that GM’s plan to return to profit wasn’t
aggressive enough and ordered new Chief Executive Officer Fritz Henderson to cut $47
billion in unsecured claims by more than the 59 percent the Detroit-based automaker
proposed in February.
GM bonds have lost about half their value since Obama said a bankruptcy may be needed
to shrink debt. GM’s $3 billion of 8.375 percent notes maturing in July 2033 fell to 9
cents on the dollar from 18 cents on March 27, according to Trace, the bond- price
reporting system of the Financial Industry Regulatory Authority. The yield is 91 percent.
GM rose 10 cents, or 5.6 percent, to $1.88 at 10:10 a.m. in New York Stock Exchange
composite trading. The shares have lost half their value since Obama rejected the GM
“I don’t think there’s much incentive for anyone to make serious concessions until either
you’re in Chapter 11 or it becomes clear that the government is going to bail everyone
out,” said Andrew Rahl, co-leader of Reed Smith LLP’s bankruptcy group in New York.
“It would be a more elegant solution to have those changes ordered by a judge” in
GM must slash the UAW health-fund obligations to less than the $10.2 billion and bond
debt to less than $9.2 billion, amounts proposed in the now-rejected plan, or face a
government- backed bankruptcy.
Bondholders haven’t been involved in GM’s restructuring discussions since CEO Rick
Wagoner was replaced, and they haven’t been presented with a new proposal, according
to people familiar with the talks.
Renee Rashid-Merem, a GM spokeswoman, and Jenni Engebretsen, a spokeswoman for
the Treasury, declined to comment.
If GM is forced to seek bankruptcy protection, it would focus on forming a new company
from its best assets, people familiar with the planning said last week. GM has stepped up
planning for that outcome since Obama said it was more likely, the people said.
The U.S. is also considering converting some of the $13.4 billion it lent GM into equity
in the restructured automaker, people familiar with those plans said this week. That may
leave less equity for bondholders, the people said.
The 10-member ad hoc committee of bondholders, whose members include San Mateo,
California-based Franklin Resources Inc. and Fidelity Investments of Boston, has been in
contact with about 100 institutions representing about $12 billion of GM bonds,
according to a person familiar with the panel.
The bondholders believe they are protected by the bankruptcy code from being given
worse treatment than other creditors, such as the unions, and will fight a proposal they
find unfair, the person said.
“I would be concerned here that the government will be able to put on a sufficiently
compelling case to implement their plan even if normal bankruptcy lawyers would
object,” Bracewell Giuliani’s Flaschen said. “It’s something I caution clients on all the
time: The law is certainly very important, but it’s not the end of the analysis.”
Bill Zabowski, 58, said he’s worried the concessions being demanded of bondholders are
arbitrary. He bought GM bonds in 2005 to provide him with retirement income, he said.
“It’s a draconian cut on the bonds right now,” said Zabowski, who works as an
advertising and marketing executive from his home in Bloomington, Minnesota. “My
frustration has been, who picked that number? Who decided that GM had to wipe out
two-thirds of their debt?”
Zabowski said he also was unhappy over the bondholders’ exclusion from restructuring
“I’ve never seen anything so screwed up in my life -- I’ve never seen something this big
where there’s been no dialogue between the parties with skin in the game,” Zabowski
said. “Everybody’s talking smack, but nobody’s got anything on the table.”
Retirees’ interests are being championed by unions that spent $52 million to help elect
Obama, including $5 million from the UAW, according to OpenSecrets.org, a
Washington-based organization that tracks campaign spending.
George Schoen, 82, of Plymouth, Michigan, who worked at GM for 25 years, said he’s
counting on GM and U.S. government to protect his medical benefits.
GM ‘Promised Us’
“They more or less promised us health care for life,” Schoen said. “They’d better keep it.
I don’t think the government would let them eliminate our coverage.”
GM and the UAW agreed to establish the union-run health fund, known as a Voluntary
Employee Beneficiary Association, or VEBA, as part of their 2007 labor contract. GM
said it would pay about $32 billion into the VEBA in exchange for the UAW assuming an
estimated $47 billion in future health-care costs. A Detroit judge approved the settlement
Under the 2007 contract, the union agreed that new hires wouldn’t qualify for the VEBA,
instead getting a $1 contribution to a 401(k) fund for each hour of work. New employees
also earn about half the $28 hourly pay of current ones.
The U.S. bankruptcy code allows for workers to get preference over bondholders, said
Richard Hahn, co-chairman of the bankruptcy practice at Debevoise & Plimpton LLP, a
New York law firm, who isn’t involved in the GM negotiations.
Section 1114 of the bankruptcy code requires that a debtor “timely pay” all “retiree
benefits” unless the bankruptcy court orders otherwise or the authorized representative of
the recipients of those benefits agrees to other treatment, he said.
“The size and scope of what’s at stake here is so profound, I’m not aware of any
precedents,” Bracewell Giuliani’s Flaschen said. “Because of that, do you want to be the
bankruptcy judge that shuts down GM? The bondholders’ basic argument is ‘It’s not
fair,’ and that is a legitimate argument. I don’t know that that will carry through the
To contact the reporters on this story: Jeff Green in Southfield, Michigan at
firstname.lastname@example.org; Caroline Salas in New York at email@example.com
Last Updated: April 15, 2009 10:19 EDT