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GM, auto workers union reach tentative deal

The agreement modifies the United Auto Workers' labor contract and GM's obligations to fund a trust to pay retiree health benefits, removing a hurdle to the automaker's June 1 restructuring deadline.

May 22, 2009|Jim Puzzanghera

WASHINGTON — General Motors Corp. cleared a major obstacle Thursday when it reached a tentative agreement with the United Auto Workers union to modify its labor contract, but Obama administration officials continued to signal that bankruptcy might be the best option.

"GM faces a number of hurdles, and it may well be a court process is necessary to effectuate the restructuring," said a senior administration official who was not authorized to speak publicly.

GM is careening toward the government's June 1 restructuring deadline. The next step -- persuading holders of $27 billion in bonds to exchange nearly all of it for company stock -- must happen by Tuesday.

Bondholders, many of them small investors, are balking at the terms of that swap, which are significantly worse than those given to the UAW.

The struggling automaker said in a Securities and Exchange Commission filing this week that it did not expect to reach a deal with its debt holders before that deadline.

The federal government has lent $15.4 billion to GM since December to keep the company afloat. But a government-backed restructuring in Bankruptcy Court, similar to what Chrysler is undergoing, is looming.

GM said in the SEC filing that it didn't expect to close a deal with the UAW by the June 1 deadline. But the UAW announced Thursday that it had reached a tentative agreement with GM to modify its labor deal and the company's obligations to fund a trust to pay retiree healthcare benefits.

The Obama administration called the tentative agreement "a positive development in GM's effort to restructure and become a strong, viable company going forward."

The administration also took another step to boost GM and Chrysler on Thursday, announcing that it was investing an additional $7.5 billion in GMAC, which provides auto financing to consumers and dealers.

The funding, on top of $5 billion the government invested in GMAC in December, will help the company handle new loans to Chrysler dealers and car buyers as well as fill capital needs identified during the recent bank stress tests, Treasury officials said. As part of Chrysler's bankruptcy, GMAC is taking on the financing role of Chrysler Financial.

The government will convert its earlier investment into a 35.4% ownership stake in GMAC and could become majority owner if the company needs to convert the new investment into common stock to meet capital requirements.

Few details released

The UAW did not release details of the agreement because it has not been ratified by its members at GM. The union said it was in the process of scheduling a ratification vote. GM officials would not comment.

Reducing union costs is crucial for GM as it tries to shrink its debt. The UAW, GM and officials from President Obama's auto task force have been negotiating the revisions.

The agreement probably mirrors modifications the union made with Chrysler before it entered bankruptcy proceedings, which included plant closing and layoffs, said Gary N. Chaison, a labor relations professor at Clark University in Worcester, Mass. UAW members are expected to approve it, he said.

As part of a restructuring plan announced last month, GM said it would offer the union as much as 39% of the company's common stock in exchange for cutting the $20 billion the automaker owes the retiree healthcare trust.

"It's difficult for a company that is on the threshold of bankruptcy to say, 'Take our stock,' " Chaison said. "The UAW has this obligation, and it just wants to get the money to provide the obligation to retirees. It's caught between a rock and a hard place."

The debt-for-equity swap is a risk for UAW members but should protect the union from deeper cuts by a bankruptcy judge.

"This puts a lot of pressure on the bondholders now," Chaison said. "It's seen as the UAW doing its part."

Bondholder offer

The deal offered to the UAW is much better than the one proposed to bondholders. In exchange for $24 billion of their debt, they would receive a 10% stake in GM. The federal government would get the majority stake, at least 50%, in exchange for about $10 billion of its debt.

About 25 small bondholders came to Washington this week to push for a better deal. They met with the staffs of about 40 lawmakers but were unable to get a meeting with Obama administration officials, said Jim Graves, 58, a software developer from Celebration, Fla.

He and his wife own more than $100,000 in GM bonds, which they bought as an investment. His mother, Vivian Floyd, a GM retiree from The Villages, Fla., also owns more than $100,000 in GM bonds.

"I don't think we have any quarrel with what the UAW was offered as long as what we're offered is in balance to what we're giving up," he said.

To avoid bankruptcy, GM has said it needs holders of at least 90% of the debt to accept the deal by Tuesday.

Graves predicted that few bondholders would accept GM's current offer and said that he and other small bondholders think they would get a better deal from a bankruptcy judge. He hopes it won't come to that but says it will be the fault of GM and the government if it does.

"If they continue down this path, then they're the ones who are forcing this into bankruptcy," he said.

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jim.puzzanghera@latimes.com

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