VIDEO: Erik Lie Research Suggests Bankruptcy Won't Help GM Much

A press release from the University of Iowa that merits attention:

VIDEO: Erik Lie Research Suggests Bankruptcy Won't Help GM Much: "June 1, 2009

VIDEO: Erik Lie Research Suggests Bankruptcy Won't Help GM Much

New research by Erik Lie, a finance professor in the Tippie College of Business, suggests today's bankruptcy filing by General Motors will be of little help to the company's long-term prospects. In this video, he explains that his study shows most companies declaring Chapter 11 bankruptcy emerge too soon and with too much debt to remain competitive with their peer companies.

http://tippie.uiowa.edu/news/media/LieGM.m4v"

(Yes Erik Lie is the professor who broke the post-dating of stock option grants wide open several years ago.)

G.M.’s Big Bankruptcy, by the Numbers - DealBook Blog - NYTimes.com

More on the story that everyone seems to be talking about.

G.M.’s Big Bankruptcy, by the Numbers - DealBook Blog - NYTimes.com:

"...excluding financial companies — which generally have bigger balance sheets than industrial companies — G.M. isn’t the reigning Chapter 11 heavyweight. The largest nonfinancial bankruptcy in United States history is that of WorldCom: when it filed in 2002, it reported about $104 billion in assets. (Many of those “assets” vanished, however, when WorldCom’s accounting fraud was straightened out.)

Nevertheless, G.M.’s reorganization will have its place in the record books.

With more than $82 billion in assets, G.M. on Monday became the largest industrial company to file for Chapter 11 protection. Its assets are more than double what Chrysler"

Be sure to see the chart at the bottom of the NY Times article.

Answers to Some Questions About G.M.’s Case - NYTimes.com

Answers to Some Questions About G.M.’s Case - NYTimes.com:

"General Motors followed Chrysler into bankruptcy on Monday in a case that will be one of the largest and most complex in history. It hopes to follow the same path Chrysler has taken through court, but there will be some differences between the two cases. Here is a quick look at some basics of the G.M. bankruptcy."

GM says Chrysler-like deal best bankruptcy option | Reuters

GM says Chrysler-like deal best bankruptcy option | Reuters:

"General Motors Corp (GM.N) on Thursday said that if it files for bankruptcy it would most likely pursue a quick sale of its best assets to a new operating company similar to the process now reshaping Chrysler LLC.

The disclosure, which came in a filing for U.S. securities regulators, marked the first time that GM said it would most likely pursue the same legal strategy that Chrysler is using under federal oversight to slash its debt and dealerships."

It's about time. At least last year (Fall Semester) my MBA students had come to the same conclusion.

NHL, Team in Bankruptcy Showdown - WSJ.com

Another sports story with finance ties, or a finance story with sports ties, you decide:

The case centers on Jim Balsillie (he of Blackberry fame) wanting to buy the team and move it to Southern Ontario. But to do this he has to 1. buy the team 2. get the league to approve 3. get out of Dodge (or Phoenix in this case).

To that end, he has made an offer that is contingent on being allowed to move the team. This got sudden urgency this week as the owner of the team he is trying to move, the Phoenix Coyotes, is in bankruptcy.

From the WSJ: NHL, Team in Bankruptcy Showdown - WSJ.com:

"... lawyers for the NHL and one of its 30 teams, the Phoenix Coyotes, will face off in U.S. Bankruptcy Court in Phoenix two days after the franchise's parent company...filed for protection under Chapter 11 of the U.S. Bankruptcy Code. The filing came after months of speculation that the team's owner, trucking magnate Jerry Moyes, was running out of cash to cover ongoing losses that, according to court documents, totaled nearly $30 million last year. Mr. Moyes owns Swift Transportation Co. and is coping with a severe downturn in the U.S. shipping industry a year and a half after taking on $2.5 billion in debt to take the company he founded private....

The Coyotes have a 30-year lease at the arena that calls for a $700 million termination fee. Given that, the only way for Mr. Balsillie to take over the team and move it was for Coyotes Holdings to file for bankruptcy, which nullifies all ongoing contracts, including leases."

As a Sabres fan, this also hits to home as the potential owner (Jim Balsillie) wants to move the team close to Buffalo (Southern Ontario). Which will likely hurt the Sabres as well as the Toronto Maple Leafs. From the Buffalo News:

"Buffalo Sabres minority owner Larry Quinn … who said 20 percent of the Sabres' revenues come from southern Ontario …."Obviously, the southern Ontario market is part of our [area of dominant influence]. It's very important to our fans. It's something we have the right to promote and market as only the Buffalo Sabres'. If we were to sell our team by promising somebody the rights in another market, we wouldn't be able to do that, so I'm assuming that other people in the league will follow those same rules.

Stay tuned.

Why Bankruptcy is needed (from the WSJ)

Obama did a good impersonation of Mr. Thompson or Wesley Mouch as he harped against bond investors and hedge fund managers (the industrialists from Atlas Shrugged), but such political name calling is not what is needed and indeed quite scary. (why scary? He is essentially asking the funds to forgo returns they deserve to pick an alternative that makes them worse off. This is not a recipe for success.)

Chrysler Goes to Court - WSJ.com:

"'I don't stand with those who held out when everyone else is making sacrifices,' Mr. Obama nonetheless declared, blaming what he called 'a small group of speculators' for the car maker's Chapter 11 filing."

The WSJ points out that this political/populist view is exactly why bankruptcy is needed:

"President Obama's broadside against bankers yesterday illustrates better than any argument ever could that bankruptcy court, and not the political arena, is where Chrysler belongs. Yesterday's filing isn't the end of the U.S. auto industry, or even necessarily of Chrysler, and it offers the best chance to protect all parties under the rule of law"

Chrysler to File for Bankruptcy - washingtonpost.com

Will GM bondholders follow their lead?

Chrysler to File for Bankruptcy - washingtonpost.com:

"Chrysler, one of the three pillars of the American auto industry, will file for bankruptcy today after last-minute negotiations between the government and the automaker's creditors broke down last night, an Obama administration official said.

U.S. officials had offered Chrysler's secured lenders $2.25 billion in cash if they would agree to writedown the $6.9 billion in secured debt that the company owed. But a small group of hedge funds refused the 11th-hour deal, forcing an imminent bankruptcy."

GM won’t make debt payment, bankruptcy ‘probable’ - The Business Journal of Milwaukee:

GM won’t make debt payment, bankruptcy ‘probable’ - The Business Journal of Milwaukee::

"General Motors Corp. won't make its $1 billion debt payment on June 1, and it is looking for a debt-for-equity exchange or court protection to lower its debt.

GM chief financial officer Ray Young said a trip to bankruptcy court is “probable,” the Wall Street Journal reported. GM is trying to reduce its $28 billion debt load."

And in other GM news Bloomberg is reporting that GM workers may have a bit more time to enjoy the summer than they had hoped:

" General Motors Corp., contending with a 49 percent decline in U.S. sales this year, will idle 15 North American assembly plants for at least a week from mid-May through July, a person familiar with the plans said. The shutdown, similar to its shuttering of factories in December, January and February, is meant to control excess inventory of unsold models on dealer lots"

GM stock price from Yahoo Finance.

Treasury Is Said to Warn G.M. of Bankruptcy Risk - NYTimes.com

Treasury Is Said to Warn G.M. of Bankruptcy Risk - NYTimes.com:

"The Treasury Department is directing General Motors to lay the groundwork for a bankruptcy filing by a June 1 deadline, despite G.M.’s public contention that it could still reorganize outside court, people with knowledge of the plans said during the weekend"

and later:

"The preparations are aimed at assuring a G.M. bankruptcy filing is ready should the company be unable to reach agreement with bondholders to exchange roughly $28 billion in debt into equity in G.M. and with the United Automobile Workers union, which has balked at granting concessions without sacrifices from bondholders."

and one last look in:

"....one potential outcome in which the “good G.M.” enters and exits bankruptcy protection in as little as two weeks, using $5 billion to $7 billion in federal financing...The rest of G.M. may require as much as $70 billion in government financing, and possibly more to resolve the health care obligations and the liquidation of the factories.... "

The question we have been talking about in class is why is it that GM has any equity value? WIth its bonds trading at less than 20 cents on the dollar, its pensioners in line to get paid, and bankruptcy looking more and more likely, we could see zero on this one.

Nissan removes cars from McAllister's Miss. lot - NFL - Yahoo! Sports

With the economy struggling, versions of this are playing out many times around the country, but given it is Deuce McAllister, I thought more would be interested in this specific case.

Nissan removes cars from McAllister's Miss. lot - NFL - Yahoo! Sports:

"Nissan began removing vehicles Tuesday from a dealership owned by former New Orleans Saints running back Deuce McAllister.

About 20 cars and trucks were loaded on tractor-trailers even as McAllister said in an interview that he is seeking investors to help pull the dealership out of bankruptcy....

McAllister filed for Chapter 11 bankruptcy protection last month after Nissan Motor Acceptance Corp. said in a federal civil suit that the free agent owed nearly $7 million, mostly in unsold vehicles still sitting on his lot.

The 30-year-old is the sole owner of the dealership, one of two he owns in Mississippi’s capital city."

Chapter 11 bankruptcy is for reorganization. From Wikipedia:

"Chapter 11 is a chapter of the United States Bankruptcy Code, which permits reorganization under the bankruptcy laws of the United States. Chapter 11 bankruptcy is available to any business, whether organized as a corporation or sole proprietorship, and to individuals, although it is most prominently used by corporate entities."

News Analysis - For U.S. and Carmakers, a Path Strewn With Pitfalls - NYTimes.com

First off, I realize there are no easy answers here. None. People will lose jobs. People will lose their investments. But that said, it REALLY scares me when governments (any government) interferes with the running of a company (any company).

News Analysis - For U.S. and Carmakers, a Path Strewn With Pitfalls - NYTimes.com:

"He [Obama] made it clear that the White House would oversee, and heavily influence, decisions about what plants to shutter, what brands of cars to abandon and how much workers and managers will be paid.

And with no edge to his voice, he left hanging the threat that he might yet force G.M. into a quick, managed bankruptcy, if it was the fastest way to remake the company. That message was directed at G.M.’s reluctant bondholders, an unsubtle warning that they must negotiate to get 16 or 20 cents on the dollar — or risk getting far less.

Mr. Obama did not nationalize the company, at least in any technical sense."

I guess GM had is coming when they asked for government money. Money rarely comes without strings attached. But this does set a very scary precedent (yeah I know, steel makers in the 1950s). Dictating how a firm is run, who runs it, and how they are paid. Let's hope this does not catch on.

And yes, I know some so called experts are claiming this is good (and indeed it is better than what France did with Peugeot where as a condition of government money job cuts were outlawed). But the GM example is so bad that it could have lasting a deleterious effects on the economy for decades to come. (Take an extreme case, suppose you are a food processor that is federally inspected. Does this Federal inspection count enough that they could dictate business dealings, pay, who runs the firm?)


NOTE: This is not saying the government moves are right or wrong. Replacing the CEO may well be needed, but it should be the Board of Directors decision. The only way I see this not being a problem is to claim they are already in effective bankruptcy and the government is merely playing the role of a bankruptcy trustee that is operating in the best interest of creditors.

General Motors Lost $85 Million Every Day

For perspective from Clusterstock :

"Running General Motors is like lighting a $1000 bill on fire every passing second"

General Motors Lost $85 Million Every Day:

"GM's total loss for the fourth quarter of 2008 was $9 billion. It's hard to imagine any number that large, so we decided to break it down...Minute: $58,333 In short, with every passing minute GM loses slightly more money than the average American household makes in a year."

It really is hard to imagine.

Sirius XM shares drop on reports of possible bankruptcy - MarketWatch

Real world example for yesterday's class...(ok so I was a few hours late ;) )

Sirius XM shares drop on reports of possible bankruptcy - MarketWatch:

"Shares of Sirius XM Satellite Radio Inc. dropped 31% in morning trading Wednesday on reports that the company could be close to filing for bankruptcy protection.
The shares were down 3 cents at 8 cents. The stock traded in the $4 range two years ago.
Sirius XM is working with bankruptcy lawyer Mark Thompson of Simpson, Thatcher & Bartlett, and Joseph Bondi, a restructuring expert, to set up a Chapter 11 filing that could come in the next few days

Bankruptcy costs (both the direct costs : lawyer fees etc. and the indirect (messed up incentives, loss of reputation, etc) are a subset of the larger financial distress costs. Which amazingly enough is exactly what we talked about in Finance 402 yesterday.

Iceland suspends stock trading, creates new bank: Financial News - Yahoo! Finance

Iceland suspends stock trading, creates new bank: Financial News - Yahoo! Finance:

"Iceland suspended trading on its stock exchange for two days and took control of the country's largest bank -- the third to be placed under its protective umbrella -- on Thursday as it grappled with a banking crisis that is threatening to engulf the entire country"

A few days ago a friend emailed and asked about class and what we were covering about the collapsing market. He then suggested I really should be teaching how to live off the land (implying a total collapse of the financial infrastructure).

Apparently he gave the same advice in Iceland where the prime minister said essentially the same thing!

From Bloomberg: Iceland Premier Tells Nation to Go Fishing After Banks Implode

``We are too small a country to sustain such a big banking system,'' he said in an interview. ``We have fantastic resources and an abundance of green energy and we will now utilize that and the other resources we have, the ocean and human capital

Competition, credit crunch push Winn-Dixie to Chapt. 11 - Food - Food & Beverages - Company Announcements

Competition, credit crunch push Winn-Dixie to Chapt. 11 - Food - Food & Beverages - Company Announcements

Given my background (my family owns a grocery store), it is always sad to see a grocery store declare bankruptcy. However at least the timing was good for my classes as we do capital structure and bankruptcy.

A few things to note from the article:

*Credit ratings do matter in the since that other creditors are less willing to lend money(in this case reducing trade credit). As the article says: "...widening losses...led to credit downgrades and a tightening of the screws by its vendors, further cutting into cash availability"

*Bankruptcy allows the firm to get out of many contracts. For instance "Winn-Dixie also said it would seek a bankruptcy judge's permission to immediately terminate the leases of two warehouses and 150 stores that could save about $60 million annually. "

*As a marketing observation it is worth noting that this is another example of how difficult it is to compete with Wal Mart and how Wal Mart has changed the once stable industry. (It should also be noted that increased competition from restaurants---about 50% of US food dollar is now spent at restaurants--has also played a major role.)

Financial Distress can reduce revenues. The USAIR case

In class discussions of financial distress all too often center on higher borowing costs. It is important to note that financial distress can also increase operating costs (who would want to work for a firm that may go out of business?), and reduce revenues.

From the Charlotte Observer:
Charlotte Observer 01/02/2005 An airline in critical condition:

"Nancy Holtzman, executive director of the Association of Corporate Travel Executives, says many corporate travel planners are worried about the airline folding. "The ongoing state of bankruptcy and the carrier's uncertain future would have any travel manager considering a back-up plan for travelers who rely on USAir's system," said Holtzman, whose association has 2,500 members. "Most of our members have already planned for that contingency.""

A perfect example of reduced revenues stemming from excessive leverage.

Prosecutor says Adelphia bankrupted by founder's greed - Jun. 16, 2004

Prosecutor says Adelphia bankrupted by founder's greed - Jun. 16, 2004

Closing arguments are underway in the Adelphia Trial. It is approaching 4 months since the trial began. Interesting, although not surprisingly, the Rigases did not take the stand (if this were Letterman, he would say it was the only thing they didn't take--just kidding!!!). Of course, they are innocent until proven guilty, but having written two published cases on Adelphia, I am of teh opinion that minimally they are guilty of amazingly poor accounting practices and an almost complete lack of minority shareholder protections.