This morning, General Motors Corp. (GM) announced that it filed for Chapter 11 bankruptcy in the U.S. Bankruptcy Court for the Southern District of New York after receiving approval from its Board of Directors, in order to implement the sale of substantially all of its assets to a newly-organized company (“New GM”) under Section 363 of the Bankruptcy Code (“363 Sale”). To implement the sale, GM and three of its domestic subsidiaries filed voluntary petitions for relief in bankruptcy court, though none of GM’s operations outside of the U.S. were included in the U.S. court filings, which have “no direct legal impact on GM’s plans and operations outside the U.S.”

After announcing yesterday that the U.S. Treasury Department had received 54% of GM bondholders’ approval of the 363 Sale as proposed by GM on May 28, GM stated today that it had reached agreement with the U.S. Treasury and the governments of Canada and Ontario to accelerate its restructuring efforts. “Pending approvals, the New GM is expected to launch in about 60 to 90 days as a separate and independent company from the current GM.” The U.S. Treasury will provide up to approximately $30.1 billion of debtor-in-possession (DIP) financing to support GM through the restructuring process, and the Canadian and Ontario governments will provide $9.5 billion in DIP financing, in exchange for debt and preferred and common equity of New GM.

New GM will execute the key elements of its April 27 viability plan and will incorporate the terms of GM’s recent agreements with the United Auto Workers (UAW) and Canadian Auto Workers (CAW) unions and will be led by GM’s current management team. GM has also asked the bankruptcy court to approve various steps intended to protect its customers and ensure that its operations continue uninterrupted, including allowing GM to provide warranty, service and customer support, backed by the U.S. and Canadian governments, to pay essential suppliers and employees in the normal course, and to respect its operating and financing agreements with GMAC, which support “continued wholesale financing for dealers and retail financing for customers.”

As part of the restructuring plan, New GM will purchase substantially all of the assets of the old GM in exchange for the U.S. government convertingthe majority of its loans to GM into various equity instruments. New GM’s capital structure will be comprised of the following:  

  • Debt: Approximately $17 billion in total consolidated debt (includes $6.7 billion owed to the U.S. Treasury, $1.3 billion owed to the Canadian and Ontario governments, $2.5 billion of notes issued to the new Voluntary Employee Beneficiary Association (New VEBA), and $6.8 billion of other debt);
  • Preferred Stock: $9 billion of perpetual preferred stock with a 9% annual cash dividend, payable quarterly (includes $2.1 billion issued to the U.S. Treasury, $0.4 billion issued to the Canadian and Ontario governments, and $6.5 billion issued to the New VEBA);
  • Common Stock: Common equity (60.8% owned by U.S. Treasury, 11.7% owned by Canadian and Ontario governments, 17.5% owned by the New VEBA, and 10% reserved for GM for the benefit of unsecured bondholders and other creditors); and  
  • Warrants: Warrants to acquire newly issued shares in New GM granted to New VEBA and GM equal to 2.5% and 15% of its outstanding common equity, respectively.  

According to the fact sheet released by the U.S. Treasury, the Obama administration has established the following four core principles that “will guide the government’s management of ownership interests in private firms”:  

  • Government has no desire to own equity stakes in companies any longer than necessary, and will dispose of its ownership interests as soon as practicable;
  • Where the government responds to a company’s request for substantial assistance, the government will reserve the right to set upfront conditions to protect taxpayers, promote financial stability and encourage growth.
  • The government will protect the taxpayers’ investment by managing its ownership stake in a hands-off, commercial manner.
  • The government will only vote on core governance issues, including selection of the company’s board of directors and major corporate events or transactions.  

GM also announced that as part of its accelerated manufacturing plan “to improve capacity utilization and flexibility for the New GM,” it would reduce GM’s total number of assembly, powertrain and stamping facilities in the U.S. from 47 in 2008 to 34 by the end of 2010 and 33 by 2012.

On the international front, GM separately announced that GM Europe has reached an agreement for €1.5 billion of bridge financing from the German government and a Memorandum of Understanding to partner with Magna International Inc. Under this agreement with the German government, “the Opel/Vauxhall group of assets have been pooled under Adam Opel GmbH, with the majority of the shares of Adam Opel GmbH being put into an independent trust (the balance to remain with General Motors), while final negotiations with Magna proceed.” GM Europe expects that the process to finalize a new partner will take several weeks to complete, and has stated that in that time it will continue with its normal operations.