“It’s more and more apparent General Motors will file for bankruptcy. >> David: The question now is when? Remember the June 1 deadline? It might happen before that. We have indications it might. And how will it affect bond holders and the workers?” Fox Business Network 5/22/2009

General Motors (GM) bondholders signaled today that they will flat out reject the conversion offer for 10% stake in the failing automaker, which pales in comparison to the portion the U.S. government and the Unions will hold of the restructured GM.  The bondholders had suggested willingness to accept a 58% equity stake in the automaker which the Obama administration has stated is unrealistic.  For a company with a market cap of less than $1 billion, it would still represent a major haircut for bondholders.  The $27 billion worth of bonds are going to go unpaid on June 1st placing GM in default and almost undoubtedly putting bankruptcy filings in motion.  However, a report out of the Washington Post today suggests that the Obama administration may force General Motors into bankruptcy as early as next week.  Shares are selling off 22% today as equity holders try to abandon the sinking ship.

The last few days had been hopeful ones for the automaker as they had replaced the onerous labor agreements with the UAW with a more sustainable agreement that lowered both labor and health care costs to help them better compete with foreign automakers.  In addition, GM’s sale of Opel (the German unit of GM) has attracted quite a bit of attention receiving 3 bids and rumors of a fourth.  The stock had rallied more than 70% coming into Friday, even with the possibility of bankruptcy looming large.  However, 3 executives knew better than to hold their shares in this situation and collectively sold off more than 200,000 shares according to a Wednesday SEC filings.  This is the second time in a month that high level executives have unloaded their stock.

If in fact, the Obama administration does force the company into bankruptcy there will no doubt be a myriad of lawsuits from bondholders who will have been denied the right to negotiate until the predetermined deadline.  Perhaps the two sides are still a long way from reaching consensus, but the same could have been said about management and the UAW just a few weeks ago.  The point is that it is not up to the government to step in, after all, at this point what good does it serve to cut negotiations off a week early.  As Douglas McIntyre points out on 247Wallst.com,

“The attempt by Chrysler creditors to halt or slow that company’s move through Chapter 11 failed in the bankruptcy court. But, those debtors were given until the government’s deadline to complete a deal. That effort may have failed, but the rules were not changed in the middle of the game.

The accusations that the Administration has trampled the legitimate rights of creditors is about to grow louder. A GM Chapter 11 filing before the end of May will be seen as depriving secured lenders and bondholders of a kind of “due process”, and that will send a signal to any other group which holds obligations from an American company receiving US aid.

The Administration’s actions with GM show that if there was ever a point at which the playing field was level, that time is gone. Those creditors that don’t knuckle under will get nothing at all.”

We do not want to get too far ahead of ourselves because the Washington Post story simply states that this early bankruptcy is a possibility and not a certainly.  It is clear that sending GM into bankruptcy early would not be fair.  Remember, it is the bondholders who are supposed to be paid first during a bankruptcy, they should have the right to protect their property given the fifth amendment right to due process under the law.

“You may have seen Phil Lebeau come on recently and talking about Ford completing its debt restructuring and Ford stock is actually on the rise off the open. They basically reduced the debt from $25.8 billion to $15.9 billion, better than expected debt restructuring by Ford there.” CNBC’s Squawk on the Street 4/6/2009

Ford Motors (F) took another big step forward on Monday as they announced that they will be reducing their debt by nearly $10 billion, thus reducing their total debt by nearly 40%.  The moves will save Ford about $500 million in interest expenses annually.  This is no small feat but of course, it did not come cheaply.  Ford saying that the restructuring will cost $2.4 billion in cash and a substantial number of shares.  The shares were issued in exchange for a 4.25% senior convertible notes due in December 2036, so about $4.3 billion in debt was exchanged for 468 million shares.  

This is yet another example of Ford being proactive in comparison to its peers, and the company’s management lead by Alan Mulally seems more capable to handle the current challenges than his counterparts at General Motors (GM) and Chrysler.  As most everyone is aware, Ford refused to take

government funding thus far, and said that at least for now, the company would be able to weather the current challenges on its own.  Next, Ford was able to renegotiate labor contracts with the UAW, as it was able to offer better terms than GM in its on going talks with the unions.  This fits right inline with Ford’s industry leadership.  Restructuring debt is something that all of the major American automakers will need to do, but Ford has it completed first and without the help (hindrance?) of the government.

Ford shares are trading about 15% higher at mid day, as these moves do strengthen the balance sheets.  At Ockham, we have a current valuation of Fairly Valued on Ford shares at current levels, and we will not likely become more positive on F until sales begin to perk back up.  This will happen eventually, but as for right now sales are extremely weak, data released last week states that Ford sales have dropped 41% from March of last year.

Perhaps the biggest story of the last week concerning the U.S. automakers has gone by without my fanfare at all.  Ford (F) has come to a labor agreement with the UAW that will allow for to compete much more effectively with the foreign automakers.  While Ford will never be able to pay workers what foreign manufacturers pay their overseas work force, they are starting to come down to what the foreign makers pay their American plant workers.  Some details were released today, according to CNBC’s Phil Lebeau:

“Ford has just ended a conference call outlining details behind the new contract that it has reached with the UAW. Remember just a couple of days ago, 59% of the members agreed to modify their contract with Ford making it the first of the big three to change its labor contracts. The one highlight that is going to get a lot of attention today is how much this lowers the hourly labor costs for Ford. Remember, there’s been some reports in the past that Ford, GM and Chrysler were all paying $70, $80 an hour to UAW members. Ford now believes with this agreement and once you strip out the the retirement healthcare trust, this agreement will lower Ford’s hourly labor costs down to $55 an hour.

For some comparison, the transplant auto companies, the foreign auto companies in the U.S. They’re at $48 or $49 and Ford believes, if you factor in work rule changes and productivity changes in the UAW agreement, that they will be at parity with the foreign automakers in the call that just ended. There’s going to be a buyout offer to Ford UAW members starting April 11th.  This is part of the company trying to bring down the number of hourly workers.”

Management at Ford is outshining their counterparts at GM and Chrysler, as they are making the moves that must be made.  This is the sort of reorganization that must be accomplished by each of these struggling companies.  Ford is going through the same sales troubles that all of the others are, but they apparently did a better job of articulating the importance of UAW concessions to making the company healthy again.  Also remember, Ford has rejected government funding to-date.

Bob Nardelli has engendered his fair share of controversy while Chief Executive of two of America’s largest corporations–The Home Depot and now Chrysler.  Today, he is at the center of a debate on Capitol Hill to assess the merits of a Federal rescue package for the automakers. Nardelli seeks $7 billion in government funding for privately-owned Chrysler because the current financial meltdown has left “The Big Three” in desperate need of a capital infusion to keep them out of bankruptcy. The trouble is that there are substantial concerns that this is a case of “throwing good money after bad” and it will be tough to convince Republican lawmakers otherwise. Especially considering that Chrysler anticipates burning through $5 to $7 billion in fiscal 2009 but as of the end of the third quarter the company only had $6.1 billion in cash. The domestic automakers need significant structural changes in order to make them sustainable and many think the best way to restructure the industry would be through Chapter 11 bankruptcy.

For anyone unfamiliar with Nardelli, he rose to prominence as a top executive at General Electric (GE). When Nardelli’s mentor, GE’s iconic CEO Jack Welch retired, Nardelli was a finalist for the job but was passed over for Jeff Immelt (still with GE but for how long?). That disappointment did not last long because almost immediately after losing the race to head up GE, he was offered the CEO position at The Home Depot (HD) in December 2000. This was his first experience in retail, and he brought the “Six Sigma” management philosophy ingrained at GE to Home Depot with mixed results.

His tenure at Home Depot has been much maligned, most of the criticism coming from the enormous $210 million severance package that he received when he was ousted in early 2007. That “golden parachute” completed what totaled nearly half a billion dollars in compensation for 6 years of under-whelming performance. During Nardelli’s tenure, HD stock was flat for six years while the stock of its closest competitor Lowe’s (LOW) doubled. Nardelli was excoriated for not maintaining Home Depot’s amazing sales growth; prior to his arrival HD sales had doubled every four years for roughly the past 3 decades. The drama climaxed at the shareholder meeting in 2006 when Nardelli stage-managed what was undoubtedly the most poorly handled board meeting in corporate history. He has been a poster child for excessive executive pay ever since.

Nardelli seems to have learned a thing or two about public relations since his unraveling after six years at the helm of Home Depot. He  agreed to take a $1 per year salary when he arrived at Chrysler, much the way Lee Iacocca had done years before. This is a symbolic gesture since eliminating his compensation will not save a company that is leaking $5 billion plus dollars a year. Similarly, the founder of Chrysler’s private equity parent, Cerberus Capital Management, said that it would forfeit any profit made from a future sale of Chrysler so that the government is not seen as funding private equity. Clearly, Cerberus just wants to get out of the auto industry, although you have got to admire his optimism in thinking that Cerberus might actually profit from the sale of Chrysler!

Nardelli is also saying the right things referring to the need to change the industry and he called any government infusion a stop gap measure rather than a “road to nowhere”. We could not agree more, but what we don’t understand is how he expects to enact this change with the UAW contracts still in place. There is a stigma associated with declaring bankruptcy but that does not mean that these businesses would shut down. Instead, Chapter 11 bankruptcy would allow the automakers to trim fat, close plants, shed car lines and models and most importantly renegotiate labor contracts. Where is it written that there must be three domestic automakers?  After all, when General Motors (GM) and Chrysler were in merger discussions recently, there was talk of curtailing Chrysler’s operations substantially. Plans were being considered to bring Chrysler’s 26 model fleet down to just 7 autos, close half of its 14 plants and cut 24,000 jobs. If a domestic automaker bailout package is approved, it will not make these bloated companies leaner and thus will not address the core issue. So, Nardelli can talk tough about cutting costs all he wants, this buyout will bring more of the same.