Chrysler Sale to Go Forward

According to the AP, the Supreme Court declined to review the appeal brought by those Indiana funds: Supreme Court to let Chrysler sale go forward. From the press release,

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.

More on Electric Cars and Plug-in Hybrids

From Joe Nocera's column in yesterday's New York Times (Talking Business: "Costly Toys, or a New Era for Drivers?").

In the documentary “Who Killed the Electric Car?” — about the EV1, an all-electric car General Motors began making in 1996 and killed once and for all in 2003 — the filmmakers posit the theory that the vehicle was done in by a grand conspiracy involving the oil industry, the Bush administration and the car industry. But that’s not what happened. Gas was cheap when the EV1 was on the market; auto buyers preferred S.U.V.’s. And the technology didn’t exist to allow the EV1 to become a viable mass-market automobile. Among its flaws, the EV1 used a nickel metal hydride battery that couldn’t get more than 75 miles before needing a charge.


“My daily commute was 37 miles one way,” wrote a man named Michael Posner on a Web site called The Truth About Cars, who drove an EV1 for several weeks back in 1997. “Every trip was loaded with drama,” he added. “If I went to lunch, I gave up a few precious miles. That could mean disaster.” At General Motors, they took to calling this problem “range anxiety.” Is it any wonder the car didn’t catch on?

So far so good, although from reading the rest of the column, I get the sense that Joe Nocera doesn't seem to actually understand how the plug-in hybrid Chevy Volt works (it doesn't "switch back" to electric; it only runs on electric -- the gas motor is just there to recharge the battery). The salient point that he gets right is that it has mainly been technological challenges (primarily with the batteries), and not a grand conspiracy, that has delayed the mass-market introduction of electric cars. Nocera concludes by doubting the ability of Tesla Motors to field an all-electric mass-market sedan (the company's next project after the Roadster), and claims that GM's Chevy Volt is the "the one to root for".

For a more cynical take on the Chevy Volt, check out Holman Jenkins's column in the Wall Street Journal from earlier this month, Business World: "What is GM Thinking?". From that column:

GM executives are not nuts. They justify the costs and risks of the Volt as a way of changing GM's image in the minds of consumers and politicians. To commit a pun, the Volt is GM's vehicle for making a bailout of GM politically acceptable.

Incidentally, the challenges of fielding viable plug-in hybrids described in both columns are consistent with what I wrote in this post, "Why Oil Prices will likely be Higher in 5 Years -- but not necessary in 10 or 15".