As required by the terms of the emergency assistance provided by Treasury last December, General Motors Corp. (GM) and Chrysler LLC (Chrysler) yesterday submitted long-term restructuring plans. The automakers first submitted restructuring plans to Congress in early December, but the deepening recession and continued erosion of consumer confidence (including public speculation about the companies' futures) required a reassessment of their earlier plans. The resulting plans call for more dramatic restructuring efforts and larger amounts of government assistance.
GM's Restructuring Plan
GM's restructuring plan includes the following key elements:
- Additional funding: GM requests up to an additional $16.6 billion in U.S. federal aid by 2011. GM has previously received a total of $13.4 billion of U.S. government aid. GM also will be requesting $6 billion of additional funding from certain foreign governments, including Canada, Germany, Sweden, Thailand and the U.K. GM's Canadian unit has previously received assistance from Canada. It has been reported that the Swedish government has ruled out acquiring GM's Saab operations, but it is unclear whether the Swedish government is withdrawing its previously announced offer to guarantee up to SEK 5 billion (approximately $866.3 million) of European Investment Bank (EIB) loans to Swedish automakers, including Saab. Also, GM has previously submitted two applications to the Department of Energy requesting $8.4 billion in funding for “advanced technology” vehicle programs. GM states that it intends to submit a third application by March 31, 2009.
- Financial outlook: GM projects that it will achieve breakeven adjusted EBIT in 2010 even in the face of a projected 2.0% decline in U.S. GDP and assuming a further decline in baseline U.S. sales from 12.0 million to 10.5 million vehicles, while still yielding a projected net present value of GM's equity of between $5 billion and $14 billion. GM also intends to convert two-thirds of its unsecured public debt to equity by year-end 2009.
- Retire brands and reduce number of dealers: GM intends to "rationalize" its vehicle sales and marketing operations in the U.S. to focus on "fewer, better entries." GM will shift its primary focus to its three strongest global brands - Chevrolet, Cadillac, and Buick - and its "premium" truck brand GMC - while also maintaining a "highly focused niche" for Pontiac. GM intends to dispose of its remaining brands (notably, Hummer, Saab and Saturn), but if it is not able to do so, it plans to phase-out those brands. By 2012, GM will also trim its roster of vehicle nameplates by 25%, to 36, of which approximately 70% will be cars or crossovers. GM also intends to reduce the number of dealerships by 25% over the next four years to 4,700.
- Suppliers - GM would shift many existing and proposed programs to healthier suppliers during the new three years, hopefully resulting in a 30% reduction in the number of suppliers to GM North America, improved utilization of supplier capacity and continued cost reductions. At the same time, GM warns that some lenders refuse to include automaker receivables in their suppliers' borrowing base calculations due to concerns about automaker viability. In addition, a number of suppliers have been threatened with “going concern” qualifications from auditors based partially on their automaker receivable exposures. To address these concerns, GM proposes that the U.S. government create a new voluntary financing program for suppliers in which automaker receivables would be guaranteed up to certain limits. GM will provide short-term liquidity support for its former parts subsidiary, Delphi Corp., by purchasing certain Delphi operations that are critical to GM (essentially reintegrating those previous GM operations back into GM).
- Labor costs and work rules: GM intends to trim 47,000 workers from its global roster, through both lay-offs and early retirement offers and other incentives, and to suspend its JOBS program . GM has also "made significant progress" with the United Auto Workers on labor costs and work rules. GM has already reduced compensation of salaried employees and is engaged in ongoing negotiations to restructure its voluntary employee beneficiary association obligations.
GM analyzed the relative merits and costs of a pre-solicited/pre-packaged Chapter 11 bankruptcy filing, a pre-negotiated cram-down bankruptcy plan, and a traditional Chapter 11 filing and concluded, unsurprisingly, that none of these alternatives was as attractive as the proposed restructuring plan, including additional government assistance.. Defects of a bankruptcy included the likely adverse effects of a bankruptcy filing on sales and revenue, the costs and possible unavailability (without government assistance) of debtor-in-possession financing and other risks of a lengthy bankruptcy.
Chrysler's Restructuring Plan
The Chrysler restructuring plan includes the following key elements:
- Additional funding: Chrysler requests an additional $5 billion of U.S. government funding. Chrysler has previously received $4 billion of aid.
- Financial projections: Like GM, Chrysler projects a difficult environment in the next few years. Based on various assumptions, Chrysler projects at least a 7% sales decline, resulting in an $18 billion revenue decline and a $3.6 billion reduction in cash flow over the next four years. To compensate, Chrysler projects a $3.8 billion reduction in fixed costs by the end of 2009 through elimination of production capacity, dropping 7 models, and trimming 35,000 workers from its rolls.
- Strategic alliance with Fiat: The lynchpin of Chrysler's plan is its previously announced strategic alliance with Fiat S.p.A. (“Fiat”), although the parties have only signed a non-binding term sheet at this point. Under the proposed alliance, Fiat would receive a 35% equity stake in Chrysler in exchange for providing Chrysler with access to its fuel-efficient vehicle platforms and technologies, distribution capabilities in growth markets, and cost savings with respect to design, engineering and manufacturing. However, Fiat has not committed to make any cash investment in Chrysler or to fund Chrysler in the future. This strategic alliance is conditioned upon Chrysler meeting all of its restructuring targets and obtaining additional U.S. government financial assistance.
- Suppliers: Like GM, Chrysler plans to squeeze even greater efficiencies and cost savings from its supplier base through contractual commitments to continue reducing prices, more generous sharing of benefits from cost-reduction ideas, and freezing the prices of many raw materials. Also like GM, Chrysler expresses concern about supplier cash flow problems and proposes a government guarantee program similar to that proposed by GM.
Like GM, Chrysler concludes that bankruptcy is a less attractive option than the alternative outlined in its plan, but acknowledges that, if it cannot restructure its balance sheet, does not obtain required concessions from its various constituencies (including labor unions, dealers, suppliers, and debtholders), and fails to receive an additional $5 billion of government support, a Chapter 11 filing may be the only alternative.