A couple weeks ago, the conventional wisdom was that Chrysler was the expendable automaker and that it could head into liquidation as a warning to GM (and Ford). Get your stuff together, or you end up like Chrysler, sold off for parts.
But while GM (GM) and its bondholders remain miles apart, it looks like, on a non-bankruptcy restructuring plan, Chrysler is apparently making progress with its workers, bondholders and potential saviour Fiat.
WSJ: The United Auto Workers union would eventually own 55% of the stock in a restructured Chrysler LLC under the deal reached by the union and the auto maker, according to a summary of the agreement that was reviewed by the Wall Street Journal.
Fiat SpA “eventually” will own 35%, and the U.S. government and Chrysler’s secured lenders together will end up owning 10% of the company once it is reorganized, that summary said.
The summary was distributed Monday evening at a gathering of union leaders in Sterling Heights, Mich. The deal was first disclosed Sunday night. The UAW aims for Chrysler workers to vote Wednesday on the proposed agreement, which requires changes to the union’s current Chrysler contract.
It appears the very real threat of liquidation bankruptcy is helping the automaker in dealing with the union. See, bondholders might be willing to take control of the plant and scraps and sell them in a firesale. Workers, alas, need actual jobs.
The latest concessions would bring the UAW contract at Chrysler closer to the pay and benefits earned by workers at nonunion auto factories operated by rivals Honda Motor Co. and Toyota Motor Corp.
“This is the eclipse of the UAW. It’s going to be a shadow of what it once was, I’m afraid,” predicted Gary Chaison, a professor of labour relations at Clark University in Worcester, Mass., who was interviewed prior to the disclosure of all details.
The accord is likely to provide outlines for labour deals at General Motors Co. and possibly Ford Motor Co., said labour experts, dealing the union a broader setback. In addition to cuts in wages and benefits, the loss of working members and their dues due to factory closings, will shrink the union’s clout and give it less money for organising and political operations. On Monday, GM said it would eliminate 21,000 hourly-wage jobs.
As for GM, Megan McArdle has a good analysis of the poker game that’s being played. Remember, Bondholders are being asked to trade their $27 billion worth of debt for a 10% stake in the company, while the UAW is asked to trade a $10 billion stake for 39% of the company:
That’s not quite as breathtakingly lopsided as it sounds at first glance; workers, being needed to keep the company going more than bondholders, tend to get relatively generous treatment by a bankruptcy court (and conservatives winding up to say they should just fire the UAW and replace them with scabs should go look at some OB literature. Firing all the plant workers would probably kill the company, which is in no shape to train an entirely new workforce.) Still, bankruptcy judges are rarely that generous–if they were, companies would have a mighty hard time floating bonds. Presumably the government is supposed to quasi-impose those terms as a condition of its debtor-in-possession financing.
But can it make a credible commitment not to provide DIP? The problem with this deal, as with the attempted Chrysler throwdown, is that the creditors would probably be better off in bankruptcy court even if the company was straight-out liquidated and its equipment sold off to other car companies. Since the government is plainly not going to let that happen, this has the feel of an empty gesture.
We’re not entirely convinced that there’s much value for GM’s equipment in a liquidation. We suspect that car-making factories and machinery in Detroit is pretty much only useful for making, well, cars in Detroit. At a time when everyone is shrinking their operations, we wonder who really needs to buy up GM’s assets. So it comes down to whether the government will, as Megan says, provide the DIP financing in order to insure an orderly bankruptcy. Even if the government says it won’t, it’s hard to see it sticking with that.