With the filing of the Calpine chapter 11 case, the word “bankruptcy” is in the news again and it is increasingly being associated with the name “General Motors.” Prior posts on the risk of GM’s insolvency are here.
GM shares fell to their lowest level since October 1987 yesterday, eventually closing at $19.85, down almost 6% from the previous day’s closing price. In related news, Toyota Motor announced that it plans to produce a record 9.06 million cars next year, which is about the same as the 9.1 million cars and trucks that GM plans to make this year. Unfortunately for GM, Toyota will produce the same number of vehicles as GM while operating under far superior financial circumstances. Toyota’s $142 billion balance sheet reflects $84 billing in equity (with only a sixth of GM’s debt), while GM’s $480 balance sheet includes only $28 billion in equity. Just to put the icing on this very bad GM cake, the United Auto Workers union this week is preparing to send a letter to GM retirees informing them that GM faces a “serious risk of bankruptcy” if it doesn’t obtain relief from burdensome health care costs.

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The fallout over the demise of commodities trader Refco reached the private-equity firm Thomas H. Lee Partners yesterday as its founder and chairman, Thomas H. Lee, departed the company to set up his own rival private-equity firm (W$J article here). Previous posts on the Refco case are here.
Over the past several years, Mr. Lee has taken a lessened role in Thomas H. Lee Partners’ business as a three person board has managed the firm. However, Mr. Lee’s break with the firm comes just weeks after the firm’s $500 million investment in Refco during 2004 became essentially worthless as the commodities-trading company collapsed in an accounting scandal earlier this fall.
Mr. Lee’s move is occurring at a volatile time for private-equity industry, which is really an outgrowth of the financing techniques that Micheal Milken and investment bank Drexel Burnham developed in the 1980’s to spur realization of shareholder value. Private-equity investors purchase controlling stakes in companies on the bet that the value of the stake will increase, often in connection with a public offering. As a result, private equity firms are accumulating huge pools of cash to invest and some of bigger firms now control companies that generate aggregate revenue that is on par with some of the largest U.S. conglomerates. Nevertheless, as more money flows into these private equity firms, the competition for the good prospects increases, which means that more mistakes — such as Thomas H. Lee Partner’s ill-fated investment in Refco — are more likely to occur.

In a widely-anticipated move, Calpine Corp. filed a chapter 11 case the Southern District of New York yesterday (I’ll bet getting a case of that size filed during the N.Y. transit strike was fun) to restructure over $17 billion in debt that the company incurred in attempting to become the largest power generator in the U.S. An earlier post on Calpine’s troubles is here.
Calpine has lined up investment banks Credit Suisse First Boston and Deutsche Bank AG to provide up to $2 billion in debtor-in-possession financing at favorable rates, fueling creditor hopes that the company will be hold on to its profitable power plants in the better wholesale energy markets, such as California and Texas. Nevertheless, it is anticipated that the company’s plan will involve selling a substantial number of less profitable plants. The company has about $27 billion in assets and presently employs about 3,300 people.

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