On Thursday, June 26, the New York-based GM treasury office went to market with 11 separate transactions that would have to be sold in quick succession using 41 different banks. Ultimately, the automaker raised a grand total of $17.9 billion from bonds and convertibles–the largest corporate debt deal ever. Despite the girth of the package, demand was strong, with the issue oversubscribed by more than $30 billion. "Normally one transaction a day is good," Khattri says. "To do 11 back to back was quite an event."

So now the deal is complete, and the question remains whether treasury's Herculean effort will pay off long term for the company. So far, the market seems to be giving a tentative thumbs-up.

The highest grades are being given for the risk management aspects of the deal, which allowed GM to term out–that is to say, push back–the timing of its pension- funding payments (See chart on page 40) and take on longer term predictable corporate debt. GM's treasury had calculated that it would need to contribute $15 billion to the pension plan from 2003 through 2007, and treasury officials say GM was comfortable that its cash flow would allow it to make the necessary payments. But "in a cyclical business like ours, people will always second-guess our ability to pay," says Khattri. "The fact that we've taken care of it now means that it doesn't hang there."

Glenn Reynolds, CEO of CreditSights, an independent credit research company, calls the jumbo deal "prudent liability management." Given the economy's shaky health, GM faced a real possibility of weaker auto sales or a further deterioration in pension funding, he argues. Either could have depressed cash flow, making it difficult for GM to fund its liabilities, or pushed the company's credit rating down, essentially cutting off the bond market as an escape route in the future.

The GM deal provided investors a degree of certainty that didn't exist before. GM "made (the pension liability) a clear expense and brought it into the discipline of cost cutting and cost control," says Bill Cunningham, head of research and credit strategy at FTN Financial. "There's a real benefit here organizationally."

Says Eric Rasmussen, managing director of taxable fixed income at Cleveland's Victory Capital Management, which has $63 billion under management: "Investors on the bond side looked on this favorably in terms of GM addressing the underfunded status of their pension plan and taking the necessary steps to raise funding."

On June 26, GM's 10-year note sold at a 375-basis-point spread above Treasuries; a month later, that spread had narrowed to 291 basis points.

Borst agrees that the new cash from the deal and the deferred obligations gives the company "much more financial flexibility" in case anything unexpected happens. "We felt this substantially improved GM's risk-return profile, on the one hand, and would hopefully take this pension issue, which was on so many people's minds, substantially off the table," he says.

However, the rating agencies' response to the deal was mixed. On the one hand, both Moody's Investors Service and Fitch Ratings cut their GM and GM Acceptance Corp., which issued $4.4 billion of the debt, in the run-up to the issue. On the other, a Moody's analysis of the bond deal said that overall it was a "prudent" move on GM's part.

This historic deal has pluses and minuses, not the least of which is the fact that the pension underfunding could fix itself if the market were to rebound significantly or legislation is adopted that would reduce the liability through a new calculations' formula. Once a company puts cash in its pension plan, Moody's noted, it can't get that money back easily, even if market conditions return the plan to full funding. And GM has taken on a debt obligation, and the interest expense related to it, in place of a pension liability that might have become less onerous if market conditions changed. But the debt is relatively cheap and "should enhance GM's free cash flow over the intermediate term."

Nothing succeeds like success, and the GM deal squarely falls in that camp. First, given the direction of rates since it was completed, the decision to sell debt looks almost prescient, although Borst and Khattri admit it was more a function of fast action and lucky timing. In fact, in the week before the sale, the GM treasury executives putting together the deal fretted because rates inched up 10 basis points as they were making preparations, Borst recalls, not for a second suspecting the sharp spike that would follow in the month after the deal was complete. By the end of July, the 10-year Treasury yield rose almost a full percentage point, from 3.53% in late June to 4.47% by the end of July. "Arguably, if we hadn't have done the transaction then, I'm not sure we'd have done it now," Borst says.

Khattri credits part of the bond issue's success to its complexity–11 separate transactions and 41 banks in the syndicate. (See chart below.) "My goal was that the whole of Wall Street should work on this," he says, even though that left GM executives with the task of keeping all those banks motivated and working together.

Re-engineering of the Tranche

For the syndicate, GM used a novel structure. Most jumbo bond deals put the lead underwriters in each tranche, giving them a vantage point to get a comprehensive view of demand for the deal. But GM's Charmian Uy, director of domestic finance who played a key role in balancing the syndicate structure, wanted to leave room for banks with specialized distribution capabilities, like Barclays on the sterling portion and Deutsche Bank on the euro issues, so it didn't include all its lead underwriters on each tranche. "What you really want to do when you put the syndicates together is make sure that you're using entities that can help complement the distribution," says Cynthia Ranzilla, vice president of U.S. funding and global markets at GMAC. "For example, some might be very strong in distribution in Northern Europe. Can you complement that with someone who has a strong distribution network in Southern Europe?" But it meant 3 a.m. conference calls with London for Khattri and Ranzilla, whirlwind trips to Europe for Borst, and round-the-clock squawking with bankers and investors for Devine and the entire treasury team. "We were all working the phones all the time," Khattri says.

It's not clear whether other companies will follow GM's lead. The rates window, to some degree, has closed. But a bond issue isn't the only alternative; companies could use equity. And in August, the IRS granted Northwest Airlines permission to use the stock of a subsidiary to fund its pension liability. "Rather than going into the marketplace, they were able to put the stock directly into the plan," says Bruce Ashton, president-elect of the American Society of Pension Actuaries.

The rise in rates and stock prices since late June has erased some of the pension underfunding. But Ashton, a partner with the Los Angeles law firm of Reish Luftman McDaniel & Reicher, says stocks and bonds could easily slide again. "Because the markets have been so variable over the last three years, and people are reminded of the fact that markets go down as well as up, I think pressure (on underfunding) is still going to be on," he says. "Many employers' interest has been piqued by the GM move, just because it was so dramatic. It hit everyone's radar screen," says Ari Jacobs, leader of Hewitt Consulting's retirement practice in the east. "I expect that there will be more interest in being aware of opportunities to find other sources of funds."