090522-GMAgreed Will GM’s deal with its workers be enough to save it from bankruptcy? AP

DETROIT — The United Auto Workers (UAW) struck a deal with General Motors and the federal government yesterday to cut labour costs, close factories and change the way retiree health care is funded.

The agreement could ease one of GM’s biggest problems: The cost of its work force. But the car maker is still struggling with crushing debt that may drive it into a bankruptcy reorganisation.

The deal is “the best news for everybody involved,” said Mr Harlan Platt, a professor at Northeastern University in Boston who teaches corporate turnarounds.

“This is great for the workers because some of their jobs will be there in the future. This is great news for the Obama administration because they’ve demonstrated they’re respecting contracts.’’

GM which has received some US$15.4 billion($22.4 billion) in federal loans, faces a government-imposed June 1 deadline to finish a major restructuring or be forced into bankruptcy protection.

The US government has told the car maker to cut labour costs, close factories, shed dealers and brands, and persuade at least 90 per cent of its bondholders to sign on for the stock-for-debt exchange.

But thousands of bondholders are expected to shun the company’s offer to take 10 per cent of its stock to wipe out US$27 billion in unsecured debt.

Mr Platt said the deal could be the catalyst for more bondholders to accept GM’s offer.

GM shares rose more than 32 per cent to US$1.92 yesterday — an increase that Mr Platt says indicates that investors see value in the company. He believes the stock could climb to around US$4 because GM will be able to restructure out of court, emerging with far less debt, lower costs, fewer brands and factories, and a rejuvenated vehicle lineup.

GM has offered bondholders 225 shares for every US$1,000 of debt.

‘’If you’re getting 225 per US$1,000 and the stock goes to US$4, which I think it will, you’re getting all your money back,’’ he said. ‘’This is going to be significantly more than they will get in a bankruptcy.’’

But Mr Douglas Baird, a University of Chicago law professor who specialises in bankruptcy cases, said the bondholder obstacle is nearly insurmountable.

“There’s a collective-action problem,” he said. “There are a lot of these bondholders. Even if there are a lot of them on board, that’s not the same as 90 per cent on board.’’

Still, the UAW deal could help shorten the length of time GM stays in bankruptcy protection, Mr Baird said, making it easier for the court to concentrate on remaining matters such as the bond debt.

The UAW was withholding details about the agreement until plant-level union officials were briefed. The union summoned officials to Detroit on Tuesday for the explanation, and local union leaders expected voting by the membership to end late next week.

The Obama administration welcomed the agreement, saying it is a positive development in GM’s “effort to restructure and become a strong, viable company going forward”.

The deal apparently came after two days of talks in Washington involving UAW president Ron Gettelfinger and new GM CEO Fritz Henderson.

The men began meeting after appearing together at a White House news conference Tuesday where President Barack Obama announced higher fuel economy standards. AP

From, Business – Friday, 22-May-2009; see the source article here.

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