General Motors said today it is taking several steps to reduce its debt and pension obligations by $11 billion.
The company, which is expected to launch a public stock offering in the coming weeks, announced the following actions today:
? A payment of $2.8 billion to the UAW Retiree Medical Benefits Trust.
? Plans to buy $2.1 billion of the preferred stock held by the U.S. Department of Treasury.
? Plans to contribute $4 billion in cash and $2 billion in common stock to GM?s hourly and salaried pension plans. GM said the stock contribution depends on a review by the U.S. Department of Labor and added that the number of shares contributed depends on the price of stock in the upcoming public offering.
?These actions will bring down our leverage by $11 billion by reducing debt and improving our pension funding position,? said Chris Liddell, GM?s vice chairman and chief financial officer, in a statement.
Robert Schulz, a credit analyst with Standard & Poor?s, estimates that GM will be left with about $28.4 billion in debt and pension obligations after all of the steps GM announced today are complete.
Under the agreement with the U.S. Treasury, GM will purchase 83.9 million shares of preferred stock at $25.50 per share, or 102% of the estimated value. The transaction is expected to close after GM?s public stock offering.
After GM completes the purchase of the preferred stock, taxpayers will have received a total of $9.5 billion from GM through repayments, interest, and dividends since the company emerged from bankruptcy in July 2009, the Treasury Department said in a statement.
However, the U.S. Treasury will still own 60.8% of the automaker through common shares of stock until GM?s public stock offering occurs. Treasury has not said how much of its common shares it expects to sell through the stock offering.
Preferred stock, unlike common stock, provides partial ownership of a company but does not provide voting rights.
GM also said today it has secured a $5-billion, five-year line of credit with a syndicate of banks. GM said it doesn?t anticipate that the credit line will be needed.
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Standard & Poor?s Schultz said securing the bank loan is an important vote of confidence in GM by the banking community. Standard & Poor?s assigned a BB+ credit rating to the line of credit today, which is one notch below investment grade and above the rating the agency has on GM?s other debt.
?It is the first time the new GM has completed a new and significant financing,? Schulz said. ?We view it as very well secured.?
Contact BRENT SNAVELY: 313-222-6512 or bsnavely@freepress.com.
General Motors news release about the financial moves:
General Motors Company today announced a series of actions to further reduce financial leverage.
?These actions will bring down our leverage by $11 billion by reducing debt and improving our pension funding position,? said Chris Liddell, GM vice chairman and chief financial officer.
GM has implemented the following capital structure actions:
Repayment of $2.8 billion outstanding on the 9% secured note provided to the UAW Retiree Medical Benefits Trust. The company will record a $0.2 billion non-cash gain in the fourth quarter of 2010 related to this early extinguishment of debt.
Completion of a $5 billion, five-year revolving credit facility with a syndicate of banks, which provides an additional source of backup liquidity. The facility is expected to remain generally undrawn.
GM expects to implement the following capital actions, conditional upon completion of GM?s public offering:
Purchase of the $2.1 billion of 9% Series A Preferred Stock held by the United States Department of the Treasury at a price equal to 102% of the $2.1 billion liquidation amount. The company will record a $0.7 billion charge to net income attributable to common stockholders for the difference between the purchase price and the recorded value of the Series A Preferred Stock.
A contribution of at least $4 billion in cash and $2 billion in GM common stock to GM?s U.S. hourly and salaried pension plans. The stock contribution is contingent upon Department of Labor review and the number of shares contributed would be determined based on the public offering price for GM?s common stock. The stock contribution will be valued as a plan asset for pension funding purposes at the time of contribution and for balance sheet purposes when the shares become fully transferable.
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In addition to the above actions, and subject to completion of the public offering, GM expects to terminate a wholesale advance agreement which provides for accelerated receipt of payments made by a financial institution on behalf of GM?s U.S. dealers pursuant to wholesale financing arrangements. Under such arrangements, GM's U.S. dealers borrow from financial institutions to fund their inventory of vehicles purchased from GM. Similar modifications will be made in Canada.
The wholesale advance agreements cover the period for which vehicles are in transit between assembly plants and dealerships. Upon termination, GM will no longer receive payments for vehicles purchased by the dealers in advance of the scheduled delivery date. This action will result in an estimated $2 billion increase to GM?s accounts receivable balance, on average depending on sales volumes and certain other factors in the near term, and the related costs under the arrangements will be eliminated.
?Completion of these actions will enable us to reduce net interest cost and preferred dividends by $0.5 billion per year,? said Dan Ammann, GM vice president of finance and treasurer. ?As importantly, we will have approximately $24 billion of total liquidity as of June 30, 2010, pro forma for these actions, our AmeriCredit acquisition, and excluding any public offering proceeds.?
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