Chrysler Ills may clear GM’s way Bankruptcy threat may prod creditors
Chrysler’s woes could turn out to be a blessing for General Motors Corp., paving a clearer path for the troubled company to avoid bankruptcy.
With less than a month before its government-imposed deadline to restructure, GM is still attempting to reduce obligations to the United Auto Workers union and to holders of billions of dollars in the automaker’s bonds.
GM Chief Executive Fritz Henderson said in an interview Monday that he expected a deal with the union, but he admitted that the bondholders posed a bigger hurdle.
Negotiations with those creditors have gotten nowhere, and until late last week, signs pointed to the possibility that GM would have no choice but to appear before a judge to wipe away its $27 billion in debt.
Then Chrysler went into bankruptcy.
By pushing the smaller automaker into Chapter 11, restructuring experts argue, the Obama administration sent a strong message to bondholders that the nuclear option is indeed on the table.
Since the GM bonds those groups hold are unsecured by collateral -- unlike in the case of the owners of secured Chrysler debt, who could recover money through asset sales -- they stand to lose nearly the entire value of their investment if forced to go to court.
“I now believe it is more probable that a GM filing can be avoided,” said Van Conway, of restructuring firm Conway, MacKenzie and Dunleavy in Birmingham, Mich. “There was a feeling by some that the government was bluffing on bankruptcy. But now it’s clearly real.”
The bankruptcy threat makes it more likely that the thousands of individuals, pension funds and investment firms that hold those bonds would be willing to accept the offer GM tendered last week: 225 GM shares for every $1,000 in debt, amounting to about a 10% equity stake in the company.
What’s more, GM says that it doesn’t require unanimous participation in that deal to make it successful. Instead, 90% have to accept the swap to avoid a filing.
“These people have a fiduciary responsibility to decide what will get the most value,” said Dennis Virag, president of the Automotive Consulting Group. “Going to court could net them nothing.”
Despite that threat, some bondholders continue to insist that the GM deal isn’t sweet enough and that they’re being asked to take a larger haircut than the UAW.
The union is being offered a 39% stake in GM, second only to the more than 50% that would go to the federal government.
“The UAW and our people have been very focused on being part of the solution and not part of the problem,” Henderson said. “The hardest thing to gauge in this situation would be the progress of the bond exchange.”
In the meantime, he said he would be closely watching the unfolding of the Chrysler bankruptcy in New York.
On Monday, the federal judge overseeing the case, Arthur Gonzalez, gave the carmaker interim access to $4.5 billion in federal financing, despite objections from some of the company’s debt holders.
At the same time, he listened to creditors’ demands in delaying a decision to transfer Chrysler assets to a new entity that would be controlled by Italian automaker Fiat. That move is a key step toward their planned merger.
Henderson said the smaller automaker’s legal situation “is not a test case” for a possible GM filing, but legal experts said it could indeed set the tone should GM be forced to go that route.
Indeed, said Larry Engel, a bankruptcy attorney at Morrison and Foerster in San Francisco, the progression of the Chrysler case this month could help the administration decide whether to push GM -- which it has loaned $15.4 billion to date -- into court as well.
“Observers will be able to quickly decide whether the normal bankruptcy rules apply,” Engel said. “Sophisticated bankruptcy players will see those patterns early.”
Even as that case progresses, GM has plenty of other matters to attend to.
Henderson said GM would restart negotiations with the UAW, which has already made big concessions to Chrysler, this week.
GM’s goal is getting the union to accept equity in exchange for roughly $10 billion in cash obligations to a retiree healthcare fund.
Though that would make the fund the company’s second-largest shareholder, Henderson said it was “his expectation” that the union would sell off much of that stake.
The UAW has not commented on disposing of possible GM holdings. On Monday it said it planned to quickly sell off its stake in Chrysler, which would amount to 55%, after the bankruptcy case is resolved.
Meanwhile, late last week GM began the process of notifying more than 40% of its 6,100 U.S. dealers that they were targeted for closure.
Henderson declined to provide details of the offers being made to those dealers, but he said that cash settlements were a possibility.
He added that GM did not anticipate problems in redistributing the inventory from dealers slated for closure, which by law the company is obliged to buy back.
Despite decades-low sales, Henderson said, that will be possible thanks to a huge production slowdown planned for this spring and summer that will reduce inventories by nearly 250,000 cars and trucks.
Henderson also acknowledged that the automaker was in talks with Fiat -- among other interested parties, including an Austrian-Canadian-Russian consortium -- to sell it a majority stake in GM’s Opel division.
Such a deal could be cemented, though not finalized, this month, he said.
According to Pierluigi Bellini, a Milan-based analyst for IHS Global Insight, any deal to buy Opel would be complicated by the fact that Germany, where Opel’s largest operations are based, has parliamentary elections in September.
While the party of Chancellor Angela Merkel, the Christian Democrats, has expressed openness to an Opel sale, the opposition Social Democrats have lined up against such an outcome, particularly if it involves Fiat, on fears of layoffs and possible plant closures.
Closer to home, Henderson said that GM had narrowed the field of bidders for its Hummer sport utility vehicle brand to two, which he did not identify. A third has been eliminated, he said, and a deal could be announced before the deadline.
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