Let's play, "Assume the Auto Bailout will Happen"
What should it look like, if the American taxpayer will be forced to fund it? A proposed one-page plan for the ‘prepack’ that commenter Rover proposes in Jim’s post below.
In this example, we use GM. The government should put GM into “conservatorship”, similar to a Chapter 11 bankruptcy and reorganization, but with government providing the debtor-in-possession (“DIP”) financing, and without the semantic headache of “bankruptcy”.
Capital structure:
- Preferred equity holders crammed to warrants; common equity holders get nothing (“donut-ed”)
- Donut the subordinate debt, w/ a nominal amount of cash and warrants
- Cram down the second-lien creditors to common, cash, and warrants
- Cram the first-lien creditors to preferred plus new senior notes issued where the debt closed yesterday
- For its DIP financing, government to get preferred equity, pari passu to the new preferred for former first-lien creditors, with warrants for common at the 1998 share price.
Reorganization:
- Enforced change in management, additional large-scale white-collar layoffs
- GM employees all sign up for Medicare (GM is not a health care company, and government can sell this with the “same health care as the President-elect and Senator John McCain), with GM and its pension picking up the difference in premiums
- Pension benefits marginally reduced in exchange for warrants on GM (“defined benefit to employee stock option plan hybrid”)
- Buyout terms mandatory for an additional 20-30% of workforce over 24-36 months; in exchange UAW receives one to two board seats.
- Open asset sales of selected plants and their associated employees to other car companies: sold in a dutch auction starting at fair value and ending at a reserve; plants are chosen by new management, UAW, and selected panel of senators, in an exercise similar to a military base closing panel
- These asset sales (which can also reduce the total headcount reduction required in the buyout bullet above) will continue until either government declares reorganization is over, the company is taken over by another company that intends to run GM as a going concern, or warrants are exercised by the government.
I’d appreciate criticism and comments in the comments.
See Yglesias’ comment. There’s no reason to assume that if the bailout happens it will happen in a smart way. The best thing is to oppose it tout court.
— Adam Greenwood · Nov 18, 11:22 AM · #
Jeremy, your model, as you suggest, closely resembles Chapter 11 bankruptcy, so what would be the advantages of doing a bailout along bankruptcy lines as opposed to bankruptcy itself?
— Alan Jacobs · Nov 19, 11:49 AM · #
what about bailing out the companies – but using their assets to lower barriers to entry in the automotive industry ,by changing industry structure ? this would enable more startups to compete , increase innovation , do alot to reduce global warming , and since america is the best country in the world in building startups , it might enable america to have the best automotive industry in the world .
while not without risks , currently there are no low risk options to this crisis.
maybe worth a try ??
— joe · Nov 20, 02:45 AM · #
Alan: a standard pre-pack bankruptcy requires 100% consent from major creditor and contractual counterparty classes — a near impossiblity given the sheer number of involved parties (dealers, suppliers, labor). And, as I’ve mentioned previously once or twice, a “free-fall” bankruptcy would likely turn into a liquidation, even if you could get a DIP.
As a result, a special proceeding would be required to avoid the due process requirements of bankruptcy while getting the same effects. (If there are any lawyers in the house, I’d be curious to know how easily this could be set up, and how easily it could be challenged in court.)
(I’m not sure I buy Jeremy’s proposed plan of reorg, but I’ll take that up later if / when I can get the sky to stop falling here on the trading desk.)
The longer this limbo period goes on, the worse it’s going to get, by the way — we are hearing anecdotal reports already that qualified buyers can’t even finance GM car purchases on the same terms as Japanese manufacturers because of the lenders’ concern about resale value (in the event that the buyer defaults).
This is why I’ve commented a couple of times (on Jim’s posts) that a free-fall bankruptcy is a disaster for all involved parties. The solution needs to be quick and arrive soon, and the clock has already started ticking. Ultimately we do need some sort of government involvement to soften the landing here — the coordination problems are far too great for a strictly market solution in an environment where all markets look cheap and capital of all kinds is very scarce.
— Rover · Nov 20, 12:51 PM · #