GM’s Government Aided Come-Back Approved

Following three days of hearings in New York’s bankruptcy courts last week, Federal Judge Robert Gerber approved a plan for General Motors to make a government aided come-back from bankruptcy. Judge Gerber noted that the multi-faceted plan was “the only available means to preserve the continuation of GM’s business”. Having filed for court protection on 1 June, General Motors will essentially create a new company, one that is free of crippling debt and costly contracts. Unsecured bondholders who were given the opportunity to present their views at the hearings made it known that they were disappointed by the refusal to consider alternative means of restructuring and that the bankruptcy process had been speeded up to comply with the Treasury’s deadline of 10 July for government aid.

The plan, which was negotiated between the Obama administration and the Detroit-based automaker, puts 60 percent ownership of the “new” GM in the hands of US taxpayers, with the balance being held by the United Auto Workers union, bondholders and the Canadian government. GM bondholders will get stock in the reorganized company, and a trust fund set up by the union has chosen to take stock instead of cash for coverage of future retiree health care costs.

Additionally GM will reduce its product range, shut down around a dozen factories and close up to 40 percent of its 6,000 dealerships, all aimed at turning itself around. Testifying at the bankruptcy hearing on Tuesday last week, GM’s CEO Fritz Henderson noted that June sales had been stronger than expected, which may be attributed in part to the speedy bankruptcy process.

With Friday’s worse than expected report on the job market revealing than 467,000 jobs were lost in June, job loss figures for 2009 stand at close to 3.4 million, shaking investor confidence. Investors will be dealing with corporation second quarter reports in the upcoming weeks, with Dow component Alcoa expected to be the first to post its results. While investors may have been satisfied with companies meeting forecasts in the first two quarters of 2009, analysts believe that companies will need to exceed expectations in order to restore investor confidence – at least to some degree.