With their first federal loan cheques in hand, General Motors and Chrysler are entering complex talks with creditors, unions and others on restructuring measures aimed at convincing Washington they can become more competitive and financially viable companies.
In conference calls, one-on-one and group meetings, the two Detroit carmakers will seek deep concessions from bondholders, dealers, suppliers and the United Auto Workers’ union to satisfy conditions of $17.4bn of emergency bridge loans approved by the US Congress last month.
GM said it expected these talks to begin this week, while Chrysler has already been talking to suppliers, dealers and the UAW for the past month.
The talks will be delicate and could fail as the companies seek to squeeze concessions from stakeholder groups with different and often competing interests.
Chrysler on Friday collected $4bn in federal assistance, which Bob Nardelli, chief executive, said would help the carmaker “continue an orderly restructuring”. GM took the first $4bn instalment of its loan on Wednesday and is due to receive another $9.4bn by mid-February.
Ford, in less immediate danger of failure than GM or Chrysler, says it plans to use federal emergency aid only if its markets worsen further.
The carmakers need to present detailed restructuring plans by February 17 and demonstrate they can achieve a positive net worth by the end of March to secure additional taxpayer funds aimed at securing their survival. Their request for bail-out loans last month was received sceptically by many lawmakers and failed in the Senate in an initial draft.
However, the UAW, facing an unprecedented challenge to its privileges, has warned that it expects all of GM and Chrysler’s stakeholders to share the cost-cutting burden, and that it hopes for a “more balanced” approach from Barack Obama’s incoming administration.
Talks on a debt exchange will be complex, analysts say, and could founder if some bondholders conclude that they have more chance of recovering their funds from a government-supervised Chapter 11 bankruptcy process.
In its submission to Congress last month, GM pledged to slash its portfolio to four core brands, exploring options for Saturn and Saab and possibly selling Hummer. It also planned to reduce its dealership network and promised lawmakers that it would become more competitive with foreign carmakers by 2012.
GM also told Congress it would “significantly reduce” the debt on its balance sheet.
Lawmakers want the Detroit companies to push the UAW to accept lower wages, smaller contributions to an employee-run health-care trust fund and a relaxation of strict work rules that they say make Detroit’s carmakers less competitive than foreign transplants.
However Ron Gettelfinger, the UAW’s leader, says that restructuring the US carmakers will be a “huge task”. The union wants Mr Obama’s administration to ease some of the requirements on restructuring mandated by Congress last month.
“Unfortunately, the terms of the loans approved by President George W. Bush single out members of our union, by demanding steeper and faster concessions from the UAW than from any part of the industry,” Mr Gettelfinger wrote in an article published in the Detroit News on Friday. “That’s not right, and we’ll work with the Obama administration and the new Congress to implement a more balanced approach.”
Mr Gettelfinger dismissed what he called “myths” about the role of work rules in the Detroit companies’ efficiency and said the carmakers were paying in part for current US health-care and trade policies.
However, analysts say bondholders might balk at swapping their debt for equity or pay-outs if the new administration relaxes labour terms.
In a recent research note, Citi analyst Itay Michaeli said that some bondholders might resist this in favour of government-funded Chapter 11 if the new administration “accepts labour terms that bondholders view as less than competitive”.