The plan for GM may be bankruptcy
The government’s sweeping plan to reshape General Motors Corp. makes it increasingly likely that the struggling carmaker will enter bankruptcy, a possibility signaled Monday by President Obama.
Rather than a bad thing, an appearance before a bankruptcy judge could actually be the key to saving the deeply troubled automaker, experts on the auto industry and administration officials suggest.
A carefully controlled bankruptcy, they contend, would help free GM from crushing obligations to its bondholders, unions and other stakeholders. And that, in turn, could give the troubled giant the breathing room it needs to face perhaps its greatest challenge: reversing its cratering sales by making cars and trucks that more people want to buy.
“The government is laying the groundwork for a filing,” said Itay Michaeli, industry analyst at Citi Investment Research, adding that the decision to do so could depend as much on “political will” as economic considerations.
Though the administration and GM say they’re trying to avoid a bankruptcy filing, the fact that they’re even discussing the possibility is a major shift.
The Detroit company had been unable to reach deals with bondholders and the United Auto Workers union by the government’s original deadline of today, despite the threat that the government could require immediate repayment of the $13.4 billion in loans it previously extended GM. So Michaeli and other industry watchers argue that there is little hope of achieving progress in the final 60-day period that the administration said it would give GM before pushing it into court.
Though it would carry risks, a bankruptcy filing could accomplish what the company could not. For example, the government is considering using the bankruptcy process to split GM into two pieces, one consisting of GM’s most promising “good” elements and the other of its “bad” weaker units and remaining debts, a senior administration official said.
“I think it’s going to be a concerted effort. The government is going to hold GM’s hand through the whole process,” said Aaron Bragman, an auto industry analyst at IHS Global Insight.
On Monday, the president acknowledged progress made in recent months by GM and Chrysler, which has been asked to merge with Italian automaker Fiat or risk being cut off from further aid. But he also pointed to the automakers’ remaining problems and their increasingly dire revenue picture.
GM sales have crashed, falling 23% in 2008; in the first two months of this year, they fell 51% while Chrysler’s fell 49%. Meanwhile, administration officials said that sales projections GM laid out in restructuring plans it submitted to the government -- predicting a return to profit by 2012 -- were overly optimistic considering the economy and the reluctance of consumers to buy cars.
In response, the administration is asking GM to meet cost-cutting measures that are even more ambitious than those recommended in the terms of the original bailout loans, when it and Chrysler received a combined $17.4 billion.
Exact terms of the government’s new demands were not revealed. But a senior official called previous requirements that GM remove $18 billion in unsecured debt and $10 billion in obligations to a retiree healthcare trust “insufficient” considering the current environment. The official, who spoke on condition of anonymity, suggested that GM would also need to force concessions from the United Auto Workers union on labor costs and to radically reduce its number of franchise car dealers.
That official said that GM would effectively get a final, two-month shot -- along with a limited, unspecified amount of capital -- to get all that done. If not, the government would escort it to court for a “surgical” bankruptcy proceeding that it says would last only 30 days.
Under bankruptcy law, a judge would have the power to alter the contracts underpinning those relationships, and even to wipe out bondholders completely. That would effectively reduce or eliminate the company’s debts.
Thus unencumbered, GM could, in theory, turn its focus to producing vehicles that best compete with offerings from such rivals as Toyota Motor Corp. and Honda Motor Co., rather than praying that car buyers will return to the high-margin SUVs and pickups they abandoned last summer.
But a bankruptcy would carry significant risks, including the possibility that consumers would choose not to buy cars from a company in that position. The administration has moved to quell such concerns by establishing a warranty guarantee program on new GM and Chrysler cars purchased while the companies are restructuring.
On Monday, Obama spoke to such concerns. Describing bankruptcy as a “tool that we can use,” the president praised the option as a way to “quickly clear away old debts” that would help GM, as well as Chrysler, “get back on their feet and onto a path to success.”
A filing would mark a dramatic step for the automaker, which long refused to even consider the idea, even as its finances became increasingly fragile and the company threatened to collapse without government aid.
With government cash in hand, GM began talks with stakeholders. As it became increasingly clear that the automaker was not making progress in those negotiations, however, its rhetoric changed. The company began openly discussing the possibility of a filing, mentioning bankruptcy more than 100 times in its annual report, for example.
On Monday, its new chief executive, Fritz Henderson, who succeeded Rick Wagoner after his ouster at the administration’s request, called a filing “more probable.”
“We understand what the game plan is,” Henderson said. “Whether out of court or in court, either way, they’ll be there to support us.”
Administration officials insisted that the government would prefer that GM restructure outside of bankruptcy, but they still held it out as a viable option. Because there is no private financing available, the government would lend GM any money it needs to survive the process and would continue to float it money afterward.
Some experts argued that the government was sending mixed messages that could undercut GM’s chances of negotiating deals on its own.
“The government is giving up huge leverage -- its ‘hammer’ -- when it assures the world it doesn’t want to see the liquidation of GM,” said Peter Kaufman, president of Gordian Group, an investment bank that specializes in distressed merger and acquisition work. “Who will come forward with their best compromise knowing Uncle Sam is there with a catcher’s mitt?”
He and others were also concerned that despite the government’s assurances to the contrary, a bankruptcy filing might not be as tidy as advertised. Like the 2005 bankruptcy filing by GM’s spun-off parts supplier Delphi, they say, such an action could drag out for years and cost billions.
“We find it hard to imagine that any bankruptcy involving the government, a union, and $45 billon of debt held by hundreds, possibly thousands, of different investors could happen quickly,” said Shelly Lombard, analyst at debt research firm Gimme Credit.
Regardless of how it happens, the administration has signaled that it intends to back the nation’s largest automaker for the immediate future.
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