Note 1/Caveat/request for comment: I am not a lawyer so I could be way off base on some of the more technical things presented.  Please offer corrections/comments where I am wholly missing something!

Note 2: This write-up is extremely acronym heavy (EAH).  Hang in there (HIT).  Hah (HAH).

Thesis: Long Motors Liquidation General Unsecured Trust Units (MTLQU)

Type: Bankruptcy claims litigation orphaned asset – the legal stub handicapper

Introduction: free stock in GM!

That got your attention.  Seriously though, I expect one MTLQU to pay out in the following range:

MTLQU is (one of) the stub(s) of the GM bankruptcy proceeding.  It is entitled to the remaining assets in the Motor’s Liquidation General Unsecured Trust (MLGUT).  The remaining assets will consist solely of GM stock, “A” warrants (10 strike 2016 maturity) and “B” warrants (18.33 strike 2019 maturity). 

MTLQU currently trades at 12.35 or so.  So if you arb out the low end, you’d be putting up 1.70 for a shot at the upside, assuming I’m correct in my analysis.   Personally, I like the GM exposure.  Call me crazy, but at 19.4 per share and 11.5 in net cash, I’m paying 7.9 per share for the operating entity, which is <2x LTM EBITDA.  How bad can this cycle turn be?  Even WEB et al have been buyers.  Yes the European stuff is mighty ugly. But I digress…

Anyhow, this write-up will not discuss the merits of owning GM beyond what you see above.  Instead, I’ll focus on the ludicrously complex nature of this MTLQU thing.  Do try and keep up.

Background:  GM filed for bankruptcy.   Who knew?

On June 1^st, 2009 at 7:57 AM, GM filed for bankruptcy.  Yep.  That happened.  Trust me.

Since then, some other neat stuff has happened.  Including (in no particular order):

• New GM purchased the choicest assets and contracts from Old GM in a 363 sale in exchange for shares of New GM.  Good deal.
• New GM has emerged from bankruptcy majority-owned by a consortium of excellent capital allocators (32%/10%/9 Tim Geithner/Jimmy Hoffa et al/Canadian Tim Geithner).  The stock has continued its march downward from its IPO price of 33 (almost to 50% off!  I know this crowd loves a deal).
• Motor’s Liquidation Corp (MLC) has handed the wind-down of Old GM’s estate to MLGUT
• MLC and MLGUT have successfully defended off ~ 2.7 to 3.1B in disputed general unsecured claims post-effective date.

MTLQU: Feasting on the GUC scrap heap.

As previously stated, MLTQU owners are entitled to the remnants of the Motors Liquidation General Unsecured Trust (MLGUT) after all Allowed General Unsecured Claimholders (AGUC) have been paid in full and all administrative expensive have been paid.

As of the last MLGUT report, MLGUT owned 26.72 million shares of GM, 24.35 million “A” warrants, and 24.35 million “B” warrants ‘free-and-clear.’  There also have been quite a few shares and plenty of cash earmarked for expected wind-down expenses.  Currently all AGUC s have received their respective distribution or have an escrow account with their distribution.  There were 30.04 million MLTQUs outstanding. 

The ultimate value to MTLQU holders will be determined by a) how many disputed general unsecured claimholders (DGUC) are denied their claims, b) how long this process will take, and c) how far MLGUT goes over budget winding down the estate.

For the purposes of this analysis, I assume that MLGUT will wind down on time (by the end of 2014 – admittedly assuming error on part of the Mayans) and within budget.[1]

The GM bankruptcy was set up in such a way so that New GM could emerge from bankruptcy while inter-creditor disputes were still being heard.  In order to do this, Motors Liquidation Corp (Old GM, referred to as MLC for short) set up multiple different trusts responsible for the oversight of different aspects of the bankruptcy estate wind-down.  One of those trusts is MLGUT, and its major responsibilities include:

• Making sure AGUCs  and MLTQU holders receive their distributions
• Resolving the remainder of the outstanding disputed general unsecured claims
• Related, resolving the remainder of the outstanding GM adversary proceedings

Bullets 2 and 3 above are where the risk comes in.  MLGUT suggest 6.7B claims remain liquidated, disputed, and reserved for.  For every $1000 in additional allowed claims, new AGUCs are entitled to the following:

• 3.98 shares of New GM
• 3.62 A Warrants (Ratio of 10/11 shares-to-warrants)
• 3.62 B Warrants (Ratio of 10/11 shares-to-warrants)
• 1.00 MTLQU

So, not only do additional AGUCs pay out assets in MLGUT that would otherwise be available to MLTQU holders but they also pay out units of MTLQU, which dilutes current MLTQU holders.  Scary, eh?

But it’s not all bad.  There is a provision forcing GM to issue new shares to the MLGUT.  GM has promised it will issue new shares to MLGUT only if AGUCs exceed 35B and up to 42B.  GM has promised a maximum of up to 30 million shares for these AGUCs.  For each 1000 in allowed claims over 35B then, GM will issue 4.28 shares (and no warrants).  So there’s an additional 0.28 or so of GM shares issuance that acts as a buffer for MTLQU.  I’m nearly certain this won’t be necessary, but for those less sanguine than I, perhaps they can derive some comfort from this fact.

30B in claims have been allowed so far. 

The recovery table, based on # of additional allowed claims @ 7.16.12 GM values, can be summarized:

 You can use this chart to determine a couple things.  1) At the current trading price of MTLQU and GM, the market is currently pricing in ~4 billion in addition AGUCs. 2) Judging from the opening paragraph of this thesis, clearly I think this is actually a worst-case estimate.

As previously stated, so far, MLC/MLGUT has successfully disallowed about 2.7-3.1B in claims out of about 3-3.5B heard so far (10% allowed-to-disallowed ratio) since the Effective Date, so they have a good track record.  A note of caution though – the allowed-to-disallowed ratio has ticked up in the past few quarters (although I expect it to head back down this quarter).  I’d be slightly wary of simply extrapolating this historical data, as it’s possible the low hanging fruit has been picked, especially considering the nature of the remaining disputed claims.

Well, don’t just stand there.  What are the disputed claims and how can we handicap them?

Welcome to the hard part.  First I think it’s important to note that all claims against the GM estate have been liquidated (given a maximum number allowable) and reserved for, and the claims bar has come and gone.  That is how MLGUT comes up with the maximum DGUC number of 6.7 billion, and it is very unlikely that this number gets any higher. 

So, let’s break down that 6.7B in claims.

In my mind, there are roughly three (five?) buckets of remaining claims.

• 0.04B in claims resolved since 6.30.12 (0.01 allowed)[2]
• 0.50B in claims resolved between 3.31.12 and 6.30.12 (0.05B of them allowed)[3]
• 1.5B of contingent claims relating to the Term Loan Avoidance Action (TLAAC)
• 2.7B to 3.1B in disputed disputed claims relating to Adversary Proceeding 12-09802 (AP12)
• 1.57 to 1.97B in disputed claims relating to everything else. (Other)  

Or, in pretty table form (in millions):

 A brief word about the AP12:  In the actual complaint, MLGUT seeks to disallow 2700 in claims.  However, as defendants, MLGUT lists claimants with 3100 in claims.  Thus, it’s not entirely clear how to treat those additional 400 in claims, so I include it in a range.

So, we’ve got 6.2B in claims remaining.  If we can eliminate ~2B, we’re in the money.

Let’s get to work.

To get to the bottom line first, I believe you can *reasonably* eliminate 1B in claims from the “Other” bucket and 1B in claims from the “TLAAC” bucket.

Furthermore, I believe there is a *interesting* potential that 0.2 to 0.6B Other, 0.5B TLAAC, and 0.75 to 1B AP12 claims are eliminated.

There is also a *small* probability that ALL of the AP12 claims are eliminated, in which case recoveries would be much higher than I lay out in the intro.

The easiest to begin with are the Other claims

These are easy, probably because I’m lazy more than anything.  This Other claims number typically embodies the reserve set up for a previously unliquidated claim that then was estimated pursuant to 3.23.2011 Order Estimating Maximum Amount of blah blah blah.[4]  These claims are a) environmental, b) litigation, c) debt (duplicative?), d) employee, e) executory contracts (not leases?) and f) other claims.

So far, MLC/MLGUT has done a fantastic job defending against these claims.  While there were a few extremely large claims in this bucket that went away (the EPA had a claim of – wait for it – 2.0B!), they’ve done very well in ADR proceedings and in front of Judge Gerber (who did the LYB and CHMT bankruptcies, and related, has a pretty clear interpretation for environmental liabilities for companies in BK).

Anyhow, I’m going to do what I told you to be wary of earlier – that is, extrapolate on an entire bucket of claims loosely based on historical data.  I flat-out assume worst-case, 33% of these claims will be allowed, base-case, 25% of these claims will be allowed, and best case, 15% of these claims will be allowed.  That seems reasonably conservative compared to a historical rate of 10%, a highest quarter of 25%, and a run rate of 11%, (2Q12, not yet published) no?  So my handy chart looks like this:

The TLAAC Claims and You.  Let’s hope your head doesn’t explode

Now we’re getting into the good stuff.

TLAACs will arise if MLGUT is successful in recovering **UP TO** 1.5B in cash from pre-petition secured debt holders.  Notice the stress on the “up to” part above.  I’m trying to get your attention.

MLGUT is suing JPM and related parties for an avoidance action.  JPM et al were paid 1.5B in cash from the DIP Loan because they had secured status.  It turns out, that sometime before the GM bankruptcy, the law firm Simpson Thacher & Bartlett (STB), on behalf of client JPM et al, accidentally *allowed* law firm Mayer Brown (MB), on behalf of client GM, to file certain lien-terminating documents in the state of Delaware.  This was not discovered until the JPM et al parties had already received full payout on their “secured” loan.

I’ve highlighted the word *allowed* because indeed MB was *allowed* to file the documents.  (One of) the question(s) before the court is (are), “Was MB *authorized* (rather than ‘allowed’ -- allowed connotes a far less active role on the part of the ‘allower’) to file those documents, thereby making them effective under Delaware law?”

So, ultimately MLGUT seeks to have the JPM et al creditors pay back **UP TO** 1.5B in cash to the Avoidance Action Trust (AAT).  IF this happens, JPM et al will likely become AGUCs in amount equivalent to what was collectable. Unfortunately, MTLQU owners will not see any benefit of that potential 1.5B regardless of the outcome of the contested dispute over who controls the AAT assets, as that money will be paid out directly to AGUCs and not to MLTQU owners.[5]

MLGUT is suing **FIRST** for declaratory judgment that indeed these Delaware filings are effective and that the liens specific to those two Delaware filings are not enforceable.  JPM et al seek summary judgment in opposite.

Again, I highlight FIRST and UP TO.  It turns out that these two financing statements at-risk before the court are only a PORTION of what was securing the Term Loan!  So even if JPM et al was to lose this first case, then MLGUT would have to submit an estimated valuation of the remaining assets under liens at the time of the bankruptcy.  A ‘legal discussion’ would ensue, where ultimately Judge Gerber would decide on the valuation.  And only then would JPM have to disgorge the difference between 1.5 billion and this judicial valuation.  That number would be the TLAAC.

Well, it just so happens that there were still 24 active financing statements filed appropriately with 24 county clerks on 24 MAJOR GM manufacturing facilities that secured the Term Loan!  These facilities have ~42.7 million square feet of active GM manufacturing PLUS 26.9 square feet of inactive/closed/sold manufacturing.[6]  So, EVEN if JPM et al lose the initial ruling (and those two liens), which it’s not clear they will, by my estimate there ought to be at least 1B worth of security here.  This valuation seems reasonable at ~21 per square foot for the active stuff and ~3 per square foot for the inactive stuff.   Note: I’d love some commentary from anyone who has been involved in *large* manufacturing transactions circa 2009, especially in some of the beaten-up rust belt areas like Detroit or Buffalo or Cleveland.

So, my three cases for the TLAAC claims look pretty straightforward:

• Worst Case:  Judge Gerber rules against JPM et al but the Term Loan is still secured by 1B in then-valuable collateral.  Allowed TLAAC = 500
• Best Case: Gerber rules in favor of JPM et al.  Allowed TLAAC = 0.
• Base Case: Allowed TLAAC = 250?  No basis for this other than it’s between worst and best.

Also, I’d like to make a note, perhaps at the sake of my own credibility, that I really have no idea what happened to this case (Adversary Proceeding 09-00504).  The last item on the Docket was almost a year ago and seemingly unrelated to the actual case itself.  The hearing on the cross-motion for summary judgment was in December of 2010.  Gerber took it under submission, and there it seems to remain.

OK! We’re in the money.  Or perhaps close enough that we don’t care.  Tell us about AP12 anyways!

If you insist.

The MLGUT is suing a consortium of claimholders (including Elliot, Appaloosa, Fortress, and other well-heeled legal veterans who might induce incontinence from simply sitting across the table) arising from a transaction that took place just before the GM bankruptcy filing.  Total disputed claims related to this suit are 2.7 to 3.1B.  MLGUT wishes, among other things, to a) equitably subordinate/disallow these claims and/or b) re-characterize 367 million in additional claims as already paid. 

The claims involved here are broken down as follows:

• ~$1050 million in “guarantee” claims
• ~$1600 million in “duplicative” claims
  • $1050 million in claims related to notes payable
  • $600 million in claims arising from a Swap Transaction
• ~$400 million in claims listed in the register and associated with defendants in the trial. As previously noted, it’s not clear why these aren’t included in the complaint so I consider these via a range.

Interestingly, New GM is in part defending the hedge funds, as they believe the MLGUT complaint, if successful, will undermine key aspects of the 363 sale that protect GM Canada.  They also own the Swap Transaction claim through their partial ownership of the Nova Scotia estate (and corresponding claim on GM), which is also worth 6.3 million shares/warrants, worth ~80 million if allowed.  Not exactly chump change, but also not really a needle mover at GM today.

So, what was the transaction?  It may have looked something like this (from the perspective of the HFs):

• Around January 2009, realize GM doesn’t want to take GM Canada into bankruptcy.
• Buy publicly traded debt of unlimited liabilityCanadian finance subsidiary (Nova Scotia Finance –NSF) for 25 cents on the dollar
  • Debt is guaranteed by GM
  • GM owns 100% OF NSF Equity.
  • NSF owns key intercompany loans to GM Canada (1.33B in face) that would become due and payable in a GM bankruptcy.
• Sue Old GM for “oppressive” conduct when it asks for a restructuring
• Agree to settle lawsuit and release GM Canada from intercompany loan for a $367 million ‘consent fee’ (~36 bond points!).
• Take NSF into bankruptcy
  
  • Since NSF debt is guaranteed by GM, receive a general unsecured claim on the GM estate (guarantee claims)
  • Since NSF has unlimited liability, in liquidation the NSF Trustee can enforce a claim on the NSF equity holder (Old GM) for all liabilities.  Receive additional GUC in Old GM through ownership of NSF estate (duplicative claim related to notes).

That’s brilliant.  Worst case, you get standard GUCs on old GM.  Base case, you get to double dip.  Best case, you get real hold out value AND you get a double-dipped GUC.

Now, you might ask, where’s the inequitable behavior in that?  Well, personally, I think it all hinges on two pieces: 1) the “consent fee” and 2) the transaction around the payment of the consent fee

• The initial fishy piece seems to be this “consent fee.” In order to maximize value, NSF Holders needed to have the notes remain outstanding in full.  Any restructuring of the notes to a lesser face value would have resulted in 2x fewer claims on the GM estate (due to the double-dip). So getting the 367 million labeled as a ‘consent fee’ and not a ‘reduction of principal’ was a crucial element.
• But seriously.  What kind of consent fee is that?  I mean, I’m not one to judge an agreed upon transaction where both sides seem supportive of a deal.  But you could go through much of history and be hard-pressed to find a transaction where the fee for agreeing to a deal was 36% of the actual deal size.  Furthermore, it seems pretty obvious that the purpose of the “consent fee” was to compensate NSF holders for their notes.  That’s not a consent fee as far as I’m aware.

• The second fishy piece relates to the consent fee but has to do with the timing of payments from GM to GM Canada to the Noteholders
• In order to fund the consent fee, GM Canada borrowed 450 million pursuant to a Trust Agreement (TA)
• The TA stated that, should the NSF note holders not execute a deal before 11:30 PM on 5/31/2009, the 450 million should be returned to GM immediately.
• The TA also stated, “time is of the essence.”
• The NSF note holders did not execute the agreement until around 7:00 AM on 6/1/2009, about 7 hours after the TA deadline.
• Naturally, GM Canada paid the note holders the consent fee from this money after the agreement was reached
• Old GM filed at 7:57 AM.  GM Canada was spared from bankruptcy.
• MLGUT claims that there was no timely amendment to this TA that extended the deadline from 11:30 PM to 7:00 AM.  Thus, GM Canada allegedly paid the note holders from funds that actually belonged to the Old GM estate.

Whether these argumentsl hold up in court or there is an appropriate legal remedy are matters where I have no opinion. But I like to think there’s a chance!

Briefly, the Swap Transaction related claim seems overstated

As stated above, the Nova Scotia Trustee is enforcing a 564 million claim on Old GM on behalf of New GM.  This claim arises from a Currency Swap Agreement that New GM purchased from Old GM in the 363 sale.  Here’s what happened:

• On July 10, 2003, NSF issued the NSF notes
  • 350 million GBP notes, guaranteed by GM
  • 250 million GBP notes, guaranteed by GM
• Upon issuance of the notes, NSF entered into a Swap Transaction with Old GM, in which NSF would give Old GM a fixed amount of CADs in exchange for a fixed amount of GBPs.  The fixed rate was ~ 2.22 GBP per CAD.
  
  • The CAD equivalent of 600 million GBPs at this point was 1334 million.
• New GM assumed this contract in the 363 sale.
• NSF went bankrupt October 8, 2009.  The GBPCAD rate was 1.69
  
  • The CAD equivalent of 600 million GBPs at this point was 1014 million
  • By my math, NSF owed its counterparty to the Swap Transaction 330 million CADs
• I have no idea where the additional 230 million claim size comes from.

So thinking back to outcomes.  What could happen to these AP12 claims?

Super-duper best case, they all get equitably subordinated.  I’m going to go ahead and call that the ‘free option’ because it seems pretty unlikely.  But for the remainder – here are my scenarios:

• Worst-case: All AP12 related claims are allowed.  2.7 to 3.1B in allowed claims
• Base-case: 734 million in related claims are disallowed.  These are claims that might be expunged if the ‘consent fee’ was re-characterized as a payment of principal.
• Best-case: 1B in claims are disallowed.  These are the claims relating to above plus excess claims relating to the swap transaction

The main trial hearing in the Nova Scotia case is scheduled for August 9^th.  There are a couple of other pre-trial hearings, including one July 17^th – the defendants are moving to restrict evidence at trial – and July 19^th – GM is moving for partial summary judgment in related to certain aspects of the trial.  It should be fun to watch!

Risks

• If not hedged, the price of GM stock.  Considering I think it’s pretty cheap at <2x EBITDA and a boat load of net cash, I suppose this risk is somewhat mitigated
• TLAAC claims come in higher than expected.  See above
• AP12 claims come in higher than expected.  See above
• Other claims come in higher than expected.  See above
• Cost overruns/timing delays/appeals

 Addendum: Claims affected since 3.31.2012

 *The maximum amount of claim 71118 was reduced according to the recent EPA settlement (Doc# 11826 Ordered 6.29.12) but the remaining 50 million claims were not yet allowed

**The 8 million is a guess related to the recent Honeywell settlement (Doc# 11898 ordered 7.3.12).  The key language is on page 5.  In the Honeywell Objection, they site Old GM’s liability for clean-up costs already incurred by GM to be about 8 million.  It makes sense that this 8 million is the ‘surviving Honeywell Claim.’

DISCLOSURE:  The author, the author's family, funds the author manages and/or is associated with, and the author's dog and/or cat may or may not have a position in any of the securities mentioned in this write up.  Any of the aformentioned may trade in and out and around any of the securities mentioned without notifying you.  Do your own diligence.  Also note this write up does not constitute legal or investment advice.  If you invest or take legal council on this write-up alone, be prepared to be called moronic by all friends/family/others.