Felix Salmon has an important new post on the practical differences between the Unions and GM’s bondholders, even if they are both formally unsecured creditors.
It’s also important to remember that the GM bondholders are unsecured, unlike the dissenting creditors in Chrysler. Whatever reservations we may have about the treatment of the creditors in Chrysler, the GM bondholders are in a substantially infeior position.
Indeed, after the U.S. and Canadian governments provide several billion dollars of presumably secured DIP financing, any recovery that unsecured creditors get will amount to a gift from the governments as secured lenders. Under the much-discussed absolute priority rule, the and post-bankruptcy secured lenders would arguably take all of the value in GM.
Time to re-read In re SPM Mfg Corp, 984 F2d 1305 (1st Cir. 1993) and the rules about “gift plans” again.
Comments
2 responses to “GM’s Bondholders”
I don’t think it should matter how, why or when the debt was obtained, but Mr Salmon says:
“Now the UAW retirees,… do not have a similar way of diversifying their GM exposure.”
First, note that GM retirees are protected by the Pension Benefit Guaranty Corporation, so their pension risk is already mostly removed from GM risk.
Second, the UAW agreed to VEBA terms which involved GM paying them over time.
In other words, they explicitly sought out GM exposure by accepting a debt from GM, in preference to cash immediately.
Just like the unsecured bondholders, they gave GM a benefit in the past in return for payments in the future.
But they were probably relying on the “full faith and credit” of an administration who is paddling around in choppy waters in a canoe.
When (not if) GM is finally capsized because of Washington mismanagement, employees past and present are going to have to come to grips with their dogmatic loyalty to their benefactors.
At some point, the government will be trying to defend their policies and the fact that the rescue was at the behest of the worker/voters will dribble out. The fact no one will buy a GM vehicle here in the US is a reflection of a much smarter population than the administration expected.