UAW Bondholders to Receive More Equity in GM than Others

By Christopher Neefus | June 1, 2009 | 8:37 PM EDT

United Auto Workers President Ron Gettelfinger. (AP photo)

( – The government takeover of General Motors amounts to a government bailout of the United Auto Workers (UAW) union, some investors in the bankrupt automaker are saying.
The Obama administration announced plans Monday afternoon for a government takeover of GM that grants the UAW a disproportionate equity share in the new company.
The ailing automaker began the takeover process by filing for bankruptcy protection Monday, reporting assets of $82.29 billion against a debt of $172.81 billion.
According to a White House fact sheet released Monday, GM owes $20 billion to a UAW trust established for workers’ health-care benefits, called the Voluntary Employee Benefit Association (VEBA).
Under the Obama plan, a new VEBA will be created, and in addition to $2.5 billion from the United States Treasury and $6.5 billion in preferred stock, it will be infused with 17.5 percent of the equity of the “New GM,” as the White House calls it.
GM’s other creditors, thousands of bondholders, are owed a far larger debt -- $27 billion -- but they will only receive 10 percent of the equity in the new company up-front.
As a result, many retail bondholders, among them holders whose retirement funds are stocked with GM bonds, say they are getting a bad deal from the U.S. government and the car company.
While the White House says that a steering committee representing 54 percent of GM’s unsecured bonds has agreed to the equity swap deal, others are still holding out.
A coalition called Main Street Bondholders, supported by the senior advocacy group 60 Plus, continues to oppose the deal. William Zastrow, president & CEO of FileMark Corporation, a Boston software company, is one bondholder who says the numbers speak for themselves.
“Our return on our investment is going to be something like 5 percent, and possibly 9 percent of GM’s as well, whereas United Auto Workers is getting something like 6 times that,” Zastrow told
 Zastrow, who owns about $240,000 in General Motors bonds, suggested that the administration’s negotiated allocation of equity is a "political move."
“Clearly, (Obama is) afraid that the UAW would strike,” Zastrow said. “(But) with 20 percent unemployment in the Detroit area, I think you could find people to fill those jobs pretty quickly -- probably the ones that they’ve already laid off. So, there’s nothing left but the politics of it; the payback for voting him into office. He promised to support (the union) when he was on the campaign trail.”
Jim Martin, president of 60 Plus, lamented the takeover at a press conference last week.

“From the beginning there’s been a lack of transparency in this entire restructuring process,” Martin said. “No one seems to have the best interests of small bondholders at heart.”
Douglas Spelfogel, head of the New York Bankruptcy and Creditors’ Rights practice at Baker and Hostetler LLP, said these bondholders will indeed have their day in court.
“The creditors need to be protected and they need to be heard, but the question is how you get all the pieces together,” he told
“The question is, is there a liquidation? Is there a way to protect the taxpayers and also to preserve the entity without strong-arming the creditors to a degree that’s improper?”
The White House, however, said the 17.5 percent stake that the UAW will receive actually represents a decrease in the equity stake it would have earned in its original negotiations with GM.
In regulatory filings, GM revealed it intended to give 39 percent of the equity in the New GM to the autoworkers’ union before negotiating down with the U.S. Treasury. 
The UAW “made important concessions on compensation and retiree health care that, while difficult, will help save jobs for active employees, pensions and health care for retirees, and make GM more competitive,” according to the White House fact sheet. 

The White House also contends that it has negotiated stricter terms with the UAW than the Bush administration had under its original loan agreement.
The UAW could not be reached for comment, but its president, Ron Gettelfinger, wrote in a letter to GM employees that “the proposed viability plan requires painful, unprecedented sacrifices from UAW members.”
The decision to give UAW 17.5 percent equity in the New GM is just one of a host of calls the White House is making during the restructuring. It also negotiated a deal with the UAW for the new GM to commit to building a new small car in the U.S. using a now-idling production plant.
Finally, the U.S. Treasury will infuse the company with $30.1 billion more, on top of the roughly $20 billion it has already loaned the automaker.
Spelfogel said bankruptcies like this one, and Chrysler’s week-ago filing, are essentially unheard of.
“I haven’t seen (a government-steered bankruptcy) before in nearly 25 years, so it’s certainly a new world,” he told “It’s going to be the most complex, government-sponsored case that anybody’s ever seen.”
Following the Monday announcement by President Obama, GM said it planned to close 14 plants by 2012, lay off 21,000 factory jobs by the end of 2011, and to outfit the new small-car plant with the capacity to build 160,000 cars a year.