General Motors Reaches Deal With Union

May 22nd, 2009 by Reed Allmand

According to an article in the Star-Telegram, the United Auto Workers struck a deal with General Motors and the federal government to cut labor costs, close factories and change the way retiree healthcare is funded.  This deal has eased one of GM’s biggest concerns, the cost of labor, as it struggles to avoid bankruptcy. The details of the deal were not released, but it’s rumored that the new agreement includes massive job losses and plant closures in the U.S. and may even include a clause for producing cars overseas. GM already plans to implement 21,000 job losses by 2010 and wants to dump much of its debt obligations to its bondholders.  Bondholders such as retired workers are furious and afraid that any changes to the bondholder’s debt will devastate them financially.

The article said:

Bondholders have resisted the 10 percent offer, complaining that they are getting too little for the money they are owed. The offer expires Tuesday but could be extended. Willa Woodard, a retired postmaster from Georgetown, Texas, bought $170,000 worth of GM bonds with her husband but said they now “stand to lose it all.” The dividends would help them pay taxes, insurance and medical costs and for the “occasional road trip to see our grandchildren.”

In order to avoid bankruptcy, GM would need to reduce the value of its bonds significantly. Of course bondholders are resisting any changes that will reduce their bond’s value even if it’s needed by GM to avoid bankruptcy.  But as the probability of a GM bankruptcy increases, in all likelihood, bondholders will be forced to take a loss. If GM files Chapter 11 bankruptcy, the bankruptcy court will have the power to reduce/discharge the bondholder debt.