the automaker's secured debtholders would get $2 billion in cash, or about 29 cents on the dollar, for their combined $6.9 billion in debt. Some of the debtholders balked at the deal, saying as secured lenders they deserved more. The Indiana funds involved in the Supreme Court appeal hold about $42.5 million, or less than 1 percent, of Chrysler's $6.9 billion in secured debt. They bought it in 2008 for 43 cents on the dollar.
Why didn't any of the bondholders who hold the other 99% of Chrysler's secured debt appeal to stop the deal? I wonder if they bought the debt at low enough prices that they'll still come out ahead with a payoff of 29 cents on the dollar.
Given the extent to which the bankruptcy deals for GM and Chrysler favor the unions over the bondholders, it will be interesting to see if unionized manufacturers will have to pay offer higher coupon rates to attract buyers of their debt in the future. We may find out soon enough1. According to Tony Jackson in his Financial Times column yesterday ("GM shows gravity of pension challenge"):
In the thunderous collapse of General Motors last week, one detail seems to have gone almost unnoticed. The old GM’s US pension fund, with its near-$100bn (£63bn) of liabilities, is being transferred lock, stock and barrel to the new entity. As a direct result, the new GM could be bankrupt again in a very few years.
GM’s US fund is, of course, in deficit, but the company has made no contributions since 2003. Back then, it put in $18.5bn, which it raised through a bond issue. Since this counted as a pre-payment, GM is not obliged to pay any more for the next year or two. However, it will then have to start plugging the gap, under the new rules set down by the Pension Protection Act of 2006. This, [independent UK consultant John] Ralfe calculates, would involve diverting $1bn to $2bn annually from operating cash flows. If GM cannot do that, bang it goes again.
We do have a government-sponsored organization designed to take over the pension funds of bankrupt companies, of course: the Pension Benefit Guarantee Corporation (PBGC). Had the PBGC taken over GM's pension, the new, post-bankruptcy GM wouldn't end up saddled with these liabilities, but that would have required GM's pensioners to take a significant haircut, since many of them earn higher pensions than the PBGC's maximum guarantee. Jackson offered the following numbers by way of example in his column,
Its maximum annual payment is $54,000 for a 65-year-old, but only $20,000 for a 50-year-old. And in Detroit, it is commonplace for car workers to retire on full pension at 50.
The PBGC has calculated that if it took over all the auto industry’s pensions, members would lose 40 per cent on average.
A 50-year-old GM pensioner with a $54,000 annual entitlement, Mr Ralfe reckons, would lose 60 per cent. Add that all up, and GM’s annual $9bn pension bill would be cut by $3.5bn.
1Or not, if the now-bankrupt auto companies end up going to the federal government for more money in the future, instead of trying their luck in the capital markets.