Let's face it here, you have companies whose liabilities exceed assets. How is the govt giving them a LOAN (which INCREASES the debt load) going to help?
Benefits of a chapter 11 to have the big 3 continue as a going concern:
- Cut off part or all of retiree benefits. HUGE legacy costs can be eliminated. (The Pension Guaranty Fund is going to take a big hit for this one though.. But that's not the automakers' problem anymore)
- Break contracts with dealerships that are preventing them from eliminating unprofitable brands
- Wipe equity holders so that they can..
- Hand the company over to the debt holders, and eliminate a big chunk of their liabilities
- Renegotiate union contracts to get their costs in line with the foreign automakers (This isn't as big of a decrease as the media makes it out to be though. This decrease will be nominal, it's cutting off the legacy costs that are key). They can also get rid of the egregious terms that require them to pay workers who are idling (What kind of ridiculous terms are those?!).
They also need to give the boot to the board of directors and all the C-level executives.
Misconceptions (probably spread intentionally by one side or the other):
- 1 million, or 3 million jobs will be lost. A chapter 11 WILL result in job losses no doubt, but they're going to close every plant and fire every employee. The job losses will have a much much smaller impact compared to what's happening in the financial sector.
- People not wanting to buy cars from a bankrupt company will eliminate any chance of recovery. People still flew on bankrupt airlines, and this shouldn't be a problem after they emerge from bankruptcy.
- They'll be unable to get DIP financing. If you're already coming out and saying that you can't get DIP financing, then why the hell should the govt give you a loan that would put them in a more junior position then a DIP lender? I would support it though, if the govt made DIP financing available to the big 3 if they propose an acceptable chapter 11 restructuring.
Is there going to be pain? Absolutely. But loaning money to an insolvent entity doesn't make them solvent since their liabilities are increasing just as much as the cash they just got.. and it accrues interest!
People might try to make the argument that "if you can give 700BB to the banks, you can give XX to the automakers." It's a different situation though. The govt is only giving money to solvent banks, and confidence is a big issue with the banking industry. They'll also most likely get their money back, with interest and with the PnL from the warrants. The automakers are insolvent, and the reason why people aren't buying their cars is because people think they suck! The govt will also most likely take a loss unless they come in senior to the senior unsecured debt holders, which would bring up a lot of legal issues.
Benefits of a chapter 11 to have the big 3 continue as a going concern:
- Cut off part or all of retiree benefits. HUGE legacy costs can be eliminated. (The Pension Guaranty Fund is going to take a big hit for this one though.. But that's not the automakers' problem anymore)
- Break contracts with dealerships that are preventing them from eliminating unprofitable brands
- Wipe equity holders so that they can..
- Hand the company over to the debt holders, and eliminate a big chunk of their liabilities
- Renegotiate union contracts to get their costs in line with the foreign automakers (This isn't as big of a decrease as the media makes it out to be though. This decrease will be nominal, it's cutting off the legacy costs that are key). They can also get rid of the egregious terms that require them to pay workers who are idling (What kind of ridiculous terms are those?!).
They also need to give the boot to the board of directors and all the C-level executives.
Misconceptions (probably spread intentionally by one side or the other):
- 1 million, or 3 million jobs will be lost. A chapter 11 WILL result in job losses no doubt, but they're going to close every plant and fire every employee. The job losses will have a much much smaller impact compared to what's happening in the financial sector.
- People not wanting to buy cars from a bankrupt company will eliminate any chance of recovery. People still flew on bankrupt airlines, and this shouldn't be a problem after they emerge from bankruptcy.
- They'll be unable to get DIP financing. If you're already coming out and saying that you can't get DIP financing, then why the hell should the govt give you a loan that would put them in a more junior position then a DIP lender? I would support it though, if the govt made DIP financing available to the big 3 if they propose an acceptable chapter 11 restructuring.
Is there going to be pain? Absolutely. But loaning money to an insolvent entity doesn't make them solvent since their liabilities are increasing just as much as the cash they just got.. and it accrues interest!
People might try to make the argument that "if you can give 700BB to the banks, you can give XX to the automakers." It's a different situation though. The govt is only giving money to solvent banks, and confidence is a big issue with the banking industry. They'll also most likely get their money back, with interest and with the PnL from the warrants. The automakers are insolvent, and the reason why people aren't buying their cars is because people think they suck! The govt will also most likely take a loss unless they come in senior to the senior unsecured debt holders, which would bring up a lot of legal issues.