Bankruptcy

GM's Plan: The Basic Outline

By Adam Levitin

The basic outline of GM's plan to reorganize (as opposed to a plan of reorganization) as it's seeping out is pretty neat.

GM wants to separate its productive assets from its liabilities. The basic way to do this is to sell the assets (piecemeal or as a going concern). The assets can then be deployed without the debt overhang and the creditors can look to the sale proceeds, which should be what they'd get if the company liquidated or they foreclosed.

This is the strategy that Chrysler has pursued with its sale to Fiat. The problem for GM is that there's nobody interested and capable of buying its assets (maybe some piecemeal sales around the edges, but not enough to matter). Anyone want 5.5 million square feet of prime Detroit office space?

GM has a pretty nifty idea, though. If it can't find an existing buyer, why not create on? It looks like GM will create a special purpose entity (New GM) to purchase its assets. How will this entity pay for the assets? A combination of cash, notes (IOUs), and its own stock. The notes and stock are easy enough to issue; the cash will be raised through a public offering of its stock, bond issuance, and loans from the US government.

So to put the numbers on this: (Old) GM's bankruptcy petition listed $82bn in assets and $173bn in debt. Old GM will sell most of its assets to New GM. Let's hypothesize that the sale is for $82bn present value. New GM will have to raise $82bn between debt and equity. Old GM will then take that $82bn (in a combo of cash, notes, and stock in New GM) and divvy it up amongst its creditors. Any remaining assets in Old GM will be liquidated catch as catch can.

Sure, there will be some fighting about exactly what gets sold and at what price, but the sale to New GM is really the only option on the table. There will also be intercreditor fights about distribution of the sale assets, but the net result will be that Old GM's creditors (including the UAW and US government) will end up holding a sizable part of New GM's equity, as well as its debt.

The use of a sale/liquidation as a type of sub rosa plan of reorganization isn't a novel idea (and this one's a steamroller), but GM's use of a specially-created, publicly traded New GM buyer strikes me as novel. To be sure, acquisition vehicles are often special purpose entities, but they are always subsidiaries of the true purchaser. Here the purchaser will be a real stand-alone company. Anyone know of other cases where this has been done? Comments are open.

Also a couple random observations:

1) Notice how GM piggybacked into SDNY jurisdiction through the filing of its affiliate Chevrolet-Saturn of Harlem, Inc., which appears to be a subsidiary of a subsidiary of a subsidiary (it appears that Saturn LLC owns Saturn Distribution, which owns Chevy-Saturn of Harlem) I wonder what the case caption will be... Will this be another Ionosphere Club? And will anyone challenge venue?

2) The rental car companies have an awful lot of exposure. ;I'm guessing this is from GM's buyback obligations. On the other hand, if there is lots of surplus GM inventory, the rental car companies might net out OK.

Full post as published by Credit Slips on June 01, 2009 (boomark / email).