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.
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
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
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
But the collapse of the
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
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
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
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
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