Even if General Motors Corp.'s recapitalization efforts succeed and it avoids a bankruptcy filing, the company still might face a bigger pension bill down the road.
The automaker last week told the Obama administration it needs $16.6 billion in additional aid, on top of $13.4 billion it already has been given. But in a filing with the Securities and Exchange Commission on Feb. 18, GM revealed it might have to seek additional financial support in 2013 and 2014 if funding conditions for its two U.S. defined benefit plans don't improve.
According to the filing, GM's combined U.S. pension assets plunged to $84.2 billion as of Dec. 31, from $104.1 billion at the end of 2007. As a result, funding levels for the two plans dropped to 87%, down from 124% a year earlier.
GM's hourly plan's funding level fell to 83% as of Dec. 31, from 120% a year earlier. Its assets fell 20.4% in 2008 to $55.5 billion.
GM's salaried plan's funding level fell to 95% from 132%, and its assets fell 16.1% to $28.7 billion in the same period.
The “weakening financial markets have significantly reduced the value of GM's large pension fund assets,” the filing states. GM pension “asset values have declined significantly over the last six months, especially so over the last quarter” of 2008.
Meanwhile, the company remains in negotiations with its bondholders. GM wants the bondholders to accept a debt-for-equity deal that would reduce its debt obligations to $9.2 billion from $27.5 billion.
In addition, company officials are in tough talks with the United Auto Workers. Under conditions of the $13.4 billion government loan, GM hopes to make half of its remaining $20 billion required contribution to a voluntary employee beneficiaries' association that funds retiree health benefits in the form of company stock, but UAW officials are balking at that idea. Believing they already accepted big cuts in retiree health care in 2005 and 2007 contract talks, union officials want bondholders to make concessions before retirees make any more sacrifices.
If the Detroit icon is unable to complete deals with its bondholders and unions, the specter of bankruptcy will loom large. It's far from clear that GM can avert a bankruptcy filing, despite efforts by various constituencies and the Obama administration to save the ailing company.
Rod Lache, an analyst at Deutsche Bank Securities Inc., New York, had placed a sell recommendation on the stock already last Nov. 10, with a 12-month, $0 price target. Joseph Amaturo, an analyst at The Buckingham Research Group Inc., New York, wrote clients in a Feb. 19 research note that bankruptcy is a likely outcome.
“Filing for bankruptcy would fix GM's uncompetitive capital structure and legacy issues. Additionally, bankruptcy will clearly better position the U.S. Treasury to get a portion or all its financial aid paid back,” wrote Mr. Amaturo, who also lowered his price target for GM to $0 from $1.
GM stock was priced at $1.77 at the end of trading on Feb. 20.
Not a given
If the company does file for reorganization under Chapter 11 of the federal bankruptcy code, it's not a given that its pension plans would be terminated. Northwest Airlines Inc., Eagan, Minn., and Delta Air Lines Inc., Atlanta, separately, entered bankruptcy protection and each emerged continuing their plans, noted Gary Ford, attorney with the Groom Law Group, Washington, and Jeremy Gold, president of Jeremy Gold Pensions, a pension, actuarial and investment consulting firm in New York.
Julie Gibson, GM spokeswoman, said the company had been providing information to the Pension Benefit Guaranty Corp. at its request. The details were confidential, and Marc Hopkins, PBGC spokesman, declined to comment.
A GM termination of its U.S. pension plans would overwhelm the PBGC's financial capacity, said Frank Todisco, interim chair of the pension committee of the Actuarial Standards Boards and a senior pension fellow at the American Academy of Actuaries, both in Washington.
Citing a P&I Daily report noting the GM hourly plan alone had $66.5 billion in projected benefit obligations as of Dec. 31, Mr. Todisco said its $11 billion in unfunded liabilities would equal the PBGC's deficit of $11 billion reported in its latest fiscal year.
”We are looking at big numbers and big concerns,” Mr. Todisco said. “It doesn't mean it (termination) will happen.”
GM “may need to make significant contributions to the U.S. hourly pension plan in the 2013-2014 time frame,” the filing states. It estimates the contributions at $5.9 billion in 2013 and $12.3 billion in 2014. GM isn't expected to be required to make pension contributions before then, although it could prepay some of those contributions ahead of time, Ms. Gibson said.
“I don't think we will make any decision on that (prepaying) anytime soon,” she added.
“General Motors is currently analyzing its pension funding strategies,” the filing stated.
The market meltdown accounted for about half of the decrease in the funding level, Ms. Gibson said. The GM investment team “actually did an extraordinary job” she said.
Mr. Todisco noted the GM pension funds have a conservative 26% allocation to equities and, therefore, would have potentially fared better in the market downturn.
Besides the market meltdown, Ms. Gibson said, “the discount rate played a big role” in the fall in the funding level. The rate fell by one percentage point in December, reducing funding by $5 billion, she added.
In addition, pension-related payments, such as for work-force cuts, contributed to the decline, she added.
Once GM's year-end reporting is disclosed, “GM's return will be considerably better — we will have lost a lot less money — than other pension funds” in general, Ms. Gibson said.
Isabelle Clary and Automotive News reporter Dave Barkholz contributed to this story.