Bloomberg, May 26, 2009, Tuesday

Bloomberg

May 26, 2009, Tuesday

Bloomberg

GM Canada Contract Cuts Labor Costs, Would Help Bankruptcy Exit

By Katie Merx

May 26 (Bloomberg) -- General Motors Corp., working on labor agreements to help speed its exit from a probable bankruptcy, won union approval of a cost-saving contract to protect jobs in Canada.

The Canadian Auto Workers, representing about 9,000 hourly employees, ratified the accord yesterday with 86 percent of the vote, letting GM freeze pension payments until 2015 and cut new hires’ pay. The United Auto Workers will present a tentative U.S. contract today to plant-level leaders in Detroit.

Shrinking labor expenses would give GM a boost in a court- ordered restructuring. Many bondholders have said they will reject GM’s plan to swap equity for $27 billion in debt by today, imperiling Chief Executive Officer Fritz Henderson’s goal of getting 90 percent approval to avoid bankruptcy.

“The conventional wisdom is that bankruptcy is imminent,” said Harley Shaiken, a labor professor at the University of California at Berkeley. He said the UAW would ratify its accord “to secure what it can before the bankruptcy, put pressure on the bondholders, and engage the larger political momentum.”

The biggest U.S. automaker must reorganize in court if it can’t do so on its own by June 1, the deadline set by President Barack Obama. Detroit-based GM is being propped up with $19.4 billion in emergency U.S. loans and projects needing $7.6 billion more after June 1.

Canada Pay

The CAW agreement would pay newly hired employees 70 percent of the full wage, increasing to 100 percent over six years, cut one week of paid time off and set the groundwork for negotiating a health-care trust to cover retiree medical costs, according to highlights shared with GM workers.

“This has been a grueling restructuring process, and no one has felt that more than our members and retirees,” CAW President Ken Lewenza said in a May 24 statement.

Approval of the contract positions the automaker to receive unspecified Canadian government aid the CAW said was necessary to keep GM Canada from being liquidated.

The UAW, representing about 54,000 GM hourly workers, hasn’t released the details of its tentative agreement.

People briefed at UAW meetings in Cleveland this month said the U.S. union retirees would give up dental and vision coverage as well as some prescription-drug benefits.

Those changes would match reductions that start as soon as July 1 for retirees at Chrysler LLC, which is already in bankruptcy. Cuts in unemployment benefits and work-rule changes at GM also would be similar, the people said.

GM has proposed that the UAW swap $20 billion of the automaker’s obligations to a retiree health-care trust for $10 billion in cash paid out over an unspecified period, and as much as 39 percent of the equity in a restructured company.

U.S. Agreement

“I would be surprised if the UAW deal passed with less than 75 percent approval,” said Art Wheaton, an industrial- relations specialist at Cornell University. “If it doesn’t get ratified, they get whatever the bankruptcy judge thinks they should get. In terms of who has the most to lose in this, it’s the workers.”

GM has about 522,000 union retirees and dependents. Only current workers vote on new contracts.

More cost cuts are coming. GM is likely to offer another round of buyout and retirement incentives, people familiar with the matter have said. GM has shed about 67,500 union jobs with similar programs since 2005. Its initial 2009 buyout consisted of a $25,000 voucher toward a new auto and $20,000 in cash.

GM is trimming salaried positions, eliminating 14 percent already this year. The automaker plans for a new set of cuts this month that may be similar in scope, and focused on North America, people familiar with the matter said this month.

Deadline Rush

The automaker is rushing to complete as many pieces of its restructuring plan as possible in advance of the Obama administration’s bankruptcy deadline.

Bondholders have so far been unwilling to accept GM’s offer that they take 225 shares in a newly created entity for each $1,000 in principal before the automaker executes a 1-for-100 reverse split of the stock. Their stake in a reorganized company would be 10 percent under GM’s government-backed restructuring plan.

GM’s offer expires at 11:59 p.m. in New York today. An ad hoc committee of large GM bondholders called the offer “neither reasonable nor adequate” and proposed a 58 percent stake. That offer hasn’t been adopted.

Individual GM bondholders have also opposed the automaker’s offer. A group that calls itself Main Street Bondholders has held rallies across the U.S. asking for inclusion in restructuring talks and better exchange terms.

A second group, GM Bondholders Unite, is trying to gather investors and hire legal representation to get “fair and equitable treatment” in any GM bankruptcy filing, according to the group’s Web site.

“In terms of the bondholder vote, no way can they get approval for what the government has offered,” said Maryann Keller, an auto analyst and president of Maryann Keller & Associates in Stamford, Connecticut. “There isn’t really much time to get agreement and I think the bondholders have expressed a generally negative reaction to what the government has offered.”

A GM bankruptcy is inevitable, Keller said, and may not be “as easy” as Chrysler’s because of the array of bondholders.

The U.S. and Canadian union agreements are intended to help GM reduce hourly labor costs so it can return to profit after a restructuring with or without court protection.

Government officials in Canada had said the CAW needed to make its local labor costs comparable with those for Toyota Motor Corp. Prime Minister Stephen Harper said May 22 the government was “committed” to helping GM restructure.

With new labor agreements, the unions can’t be made a scapegoat, said Gary Chaison, a professor of industrial relations at Clark University in Worcester, Massachusetts.

“They can say, now, that they did all that they could,” Chaison said. “If GM goes into bankruptcy, they’ll be able to say it wasn’t their fault.”

To contact the reporter on this story: Katie Merx in Southfield, Michigan, at kmerx@bloomberg.net

Last Updated: May 26, 2009 11:17 EDT