Sunday, February 15, 2009

GM, Chrysler situations smack of bankruptcy

DETROIT — Call it a bankruptcy in disguise. Although General Motors and Chrysler are scrambling to pull together plans by Tuesday showing that it makes sense for the government to support them without invoking the dreaded "B-word," the efforts look like a classic case of reorganization.

The $13.4 billion in bridge loans the Treasury Department has dispersed so far come with conditions that are typical when restructuring a company. Bondholders are being pressed to take losses and convert debt to equity, union contracts are being negotiated, and shareholders would see their equity close to wiped out.

"Right now, the auto industry pretty much is in bankruptcy," said Douglas Bernstein, managing partner of the Banking, Bankruptcy and Creditors' Rights Practice Group at the law firm Plunkett Cooney. "The only thing that hasn't been done is the filing fee hasn't been paid."

Even under a bankruptcy scenario, the government still would be the most likely provider of financing for the automakers, said Michael Fleming, another attorney at Plunkett Cooney. Given the lending environment and stigma attached to the auto industry, no banks or other lenders are likely to step up to provide debtor-in-possession financing that funds a typical reorganization.

Auto executives are loathe to consider actually filing for court protection, saying consumers already avoiding dealerships because of the economy and tighter credit conditions would never buy a car from a bankrupt automaker.

But it might be the only mechanism for General Motors Corp. and Chrysler LLC to satisfy the conditions of the government aid keeping companies afloat in the worst U.S. auto sales climate in 26 years. The Treasury Department last month hired two law firms with bankruptcy expertise to explore a possible restructuring of the companies.

GM's loan terms require it to convert at least two-thirds, or about $9.2 billion, of its debt to equity. If not enough bondholders agree, the only choice may be to reduce the debt through Chapter 11 bankruptcy, where all of them would have to accept whatever terms the court imposes.

"The threat of a bankruptcy does give some leverage to GM," Fleming said. He said the same applies to labor unions, which could find themselves worse off if one of the companies files for bankruptcy and then asks for the court to throw out its contracts.

While GM and Chrysler must spell out their strategies by Tuesday to repay their loans, prove they're viable and get the required concessions, no final deals are expected to be in place by then.

President Barack Obama still has not named a "car czar," who must review the companies' plans and certify by March 31 that the requirements have been met, so Tuesday's deadline may pass without much news about where the industry is headed.

"That makes it hard if you're GM and Chrysler," Bernstein said. "What audience are you playing to? What's the end goal?"

GM is counting on receiving another $4 billion after it submits its plan, while Chrysler has said it needs $3 billion more.

Shareholders face loss

If GM survives without bankruptcy, holders of the company's stock will still have something of value, although GM shares dropped to a 71-year low of $1.70 in November and fell 15 cents to $2.50 on Friday. But shareholders will have a much smaller slice of the pie after more stock is issued to meet the government terms. Besides the debt-to-equity conversion, the government wants GM and Chrysler to use stock instead of cash to make most of their payments to a trust that will start paying retiree health-care costs next year. The government also is entitled to a stake of up to 20 percent of each company in exchange for the loans.

Chrysler isn't publicly traded, but the conditions will severely dilute the ownership stake of its owners, Cerberus Capital Management LP and Daimler AG.

Chrysler also agreed to give Fiat SpA a 35 percent stake if their alliance plan is consummated. That could leave Cerberus and Daimler with combined ownership of less than 10 percent, according to independent auto industry analyst Erich Merkle.

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