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GM Nears Crucial Deal With UAW
By John D. Stoll
The Wall Street Journal
Friday, May 15, 2009

General Motors Corp., under the direction of the U.S. Treasury, is near a deal that would cut its hourly labor costs by more than $1 billion a year and reduce its $20 billion pledge to the United Auto Workers to cover health-care obligations, said people familiar with the matter.

The plan is still in flux, but GM and the union could finalize terms as early as next week.

The Detroit auto maker expects to halve its remaining cash outlays for retiree health costs to about $10 billion, and supplement that contribution with a 39% equity stake in the reorganized GM, the people familiar with the matter said.

Cutting GM's health-care costs is an essential part of the "controlled bankruptcy" plan the Treasury Department is formulating for GM.

GM declined to comment on the matter. A UAW spokesman couldn't be reached.

The proposed deal, which could still fall apart, would have to be approved by the UAW's 60,000 members at GM, who are expected to face steep cuts in pay and benefits, as well as 20,000 additional layoffs.

By at least tentatively agreeing to the latest concession, the union -- which once prided itself on offering members gold-plated benefits, job security and pay increases -- is taking another big hit in hopes of saving the auto maker, which employed nearly 200,000 UAW workers just a decade ago.

In 2007, the UAW moved to protect one of its key benefits: health care for retirees. It did so by agreeing to fund a new $35 billion health plan -- known as a Voluntary Employees' Beneficiary Association -- that would assume responsibility for retiree health-care costs starting in 2010.

The trust ended GM's exposure to health-care inflation by capping what it would pay in long-term health-care costs. The cap meant the UAW would eventually need to cut coverage for hundreds of thousands of retirees and their family members.

GM has already provided about $15 billion to the VEBA, but still owes $20 billion under an agreement that would have let it fund the trust over time.

The original plan was viewed as the largest UAW concession in history. The idea was to help clear long-term obligations off GM's balance sheet, and eliminate billions of dollars a year in cash outlays.

But the collapse of the U.S. auto market in 2008, and continued erosion of GM's market share, upended the company's financial assumptions, and forced the parties back to the bargaining table. People involved in the negotiations say the two sides have been able to approach an accord this time without the lengthy battles that hampered previous negotiations.

Many worries remain for union officials, say people involved in the discussions. They say that the stock GM proposes to contribute to the VEBA is illiquid and hard to value, posing a big risk for UAW members. The union had initially asked for more from Treasury officials in the negotiations, but was rebuffed.

With UAW backing in sight, people inside the Treasury are increasingly confident they can push through a massive reorganization of the auto maker, overriding protests from its bondholders and dealers. Some GM bondholders are expected to argue in court that their interests are being trampled on, with their claims taking a back seat to those of employees.

A key element in the plan is the ability to execute what the Obama administration has dubbed a "quick rinse," which would place GM under bankruptcy protection and then remove its most valuable assets from court oversight.

Treasury hopes to short-circuit protests from creditors by lining up deals before GM enters bankruptcy proceedings. In coming days GM is expected to approach secured lenders, including major banks, to renegotiate about $6 billion in debts, according to people familiar with the matter.

GM plans to ask its lenders for more time to pay its debt. It doesn't plan to ask for a significant reduction in the amount of debt it owes, said people close to the discussions.

Another critical task for the auto maker will be to persuade a bankruptcy judge that unsecured bondholders -- owed at least $27 billion -- are being treated fairly in a reorganization. GM has offered them 10% of the company's equity.

The bondholders, who say the offer is equivalent to four cents on the dollar, have fired back with a counterproposal asking for 58% of the new GM's equity, and a bigger slice than the UAW's. But administration officials, emboldened by concessions wrested from Chrysler LLC's lenders, are taking a hard line, according to people close to the Treasury.

These people say the Obama administration wants a GM bankruptcy "to be as clean as possible," but isn't "going to pay ransom to bondholders."

A steering committee representing the bondholders has had trouble persuading the administration's automotive task force to sweeten terms of a debt-for-equity swap, people attending the meetings said.

The steering committee and other bondholders expect to raise legal objections to GM's bankruptcy plan if it doesn't change the current offer, said Eric Siegert, managing director at Houlihan Lokey, which represents the steering committee.

The key to overriding bondholder challenges is whether the government can persuade a bankruptcy judge that GM is on the brink of collapse. This is known as a "melting ice cube" argument, and is often used to justify what is called a "363 sale" in bankruptcy parlance, or the immediate sale of assets whose value would likely be destroyed by a stay in bankruptcy court.

GM's bankruptcy attorneys expect to point to recent developments at Chrysler, where sales fell 48% in the month leading up to its April 30 bankruptcy filing, as evidence that GM's revenue base is akin to a melting ice cube because consumers aren't interested in buying cars from a bankrupt company, according to people working on the plan.

In a regulatory filing late Thursday, GM confirmed that it plans to sell assets to a new operating company and liquidate its remaining assets if it files for bankruptcy. The new company is expected to include brands like Chevrolet and Cadillac, and plants needed to make those products. Plants and divisions slated for closure would be sold or liquidated.

GM also told its suppliers it will make critical payments to them nearly a week before a Treasury-imposed deadline for an out-of-court restructuring. GM spokesman Dan Flores said GM will make the payments on May 28, instead of June 2, partly to support struggling car-parts makers.

Write to John D. Stoll at john.stoll@wsj.com
http://online.wsj.com/article/SB124234322059721429.html?mod=djmr_octuse6purl6