The US government will emerge as the majority shareholder in General Motors, the nation's largest carmaker, under a "take it or leave it" financial restructuring plan sprung on its bondholders yesterday.
Holders of $27bn (£18bn) of GM debt were asked to swap that investment for a 10 per cent equity stake, or face the business being put into bankruptcy – but the company's future looked more uncertain than ever last night after the committee representing them called the proposal "blatantly unfair".
Last month, the Obama administration rejected GM's more modest turnaround plans, saying it wasn't enough to make the company viable, and it fired then chief executive Rick Wagoner. So yesterday, the company promised more job cuts and factory closures, a reduction in its dealership network, and the scrapping of its historic Pontiac brand.
The centerpiece of the proposal, though, is a financial restructuring aimed at easing GM's crippling debt burden. Under the new plan, the government, which has been funneling taxpayer money into the company to keep it afloat since last December, is being asked to hand over $11.6bn more on top of the $15.4bn loaned so far, and then to swap half that money into shares.
And unions, too, are being asked to accept some shares instead of just cash to cover the cost of future pensions and healthcare benefits for workers. The employee trust, from which those benefits will be paid, will emerge as the second largest shareholder after the US government. Existing shareholders will end up with less than 1 per cent of the company. "Our objective here is to create a strategy where we can win, not simply survive," said Fritz Henderson, who was promoted to chief executive last month. "We need to have a more stable and sustainable business model, because, candidly, we only want to do this once."
However, it is far from certain that the bondholders would agree to one of the biggest debt-for-equity swaps in history. To succeed, GM will need the agreement of 90 per cent of its bondholders, who range from individuals, through "vulture" funds that specialise in trading distressed debt, in to some of the largest fund managers in the world. Mr Henderson said he thought bankruptcy was "more likely".
A committee representing around half the value of GM's bonds damned the proposal last night.
"The current offer is neither reasonable nor adequate," a spokesman said. "Both the union and the bondholders hold unsecured claims against GM. However, the union's [employee benefit trust] would receive a 50 per cent recovery in cash and a 39 per cent stake in a new GM for its $20bn in obligations, while bondholders, who own more than $27bn in GM bonds and have the same legal rights as the unions, would only receive a mere 10 per cent of the restructured company and essentially no cash."
The company also still has to get a firm agreement to their parts of the bargain from the United Auto Workers (UAW) union and from the US government, which has been working closely with GM on its plans and its negotiations.
Although the Obama administration stopped short of endorsing the new restructuring plan, a spokesman called it an "important step". He said: "The interim plan ... reflects the work GM has done since 30 March to chart a new path to financial viability. We will continue to work with GM's management as it refines and finalises this plan."
The carmaker has a 1 June deadline for presenting a financial restructuring plan that will help it weather the most serious downturn in car sales since the Great Depression. GM's talks with the UAW are still going on, the company says, but employees, particularly in its native Detroit, are already bracing for major and painful changes.
The company current employs 61,000 workers at 47 plants in North America, which it will cut to 40,000 at 34 plants by the end of next year, according to the revised plan unveiled yesterday. That is 7,000 more job cuts than was envisioned in the first restructuring plan which was rejected by the government. The company also said it would phase out its Pontiac brand by the end of next year, while Hummer, Saturn and Saab will be sold or shut down by the end of this year.