GM explores various options for bankruptcy
February 24, 2009
GM explores various options for bankruptcy
Prepackaged Chapter 11 suggested for it, Chrysler
BY TIM HIGGINS and JUSTIN HYDE
FREE PRESS BUSINESS WRITERS
Days after General Motors Corp. outlined three possible bankruptcy
scenarios, the U.S. Treasury Department acknowledged Monday that it is
exploring how it might fund a court-protected bankruptcy by GM and
An Obama administration official indicated Monday that the efforts do
not reflect any decisions about the auto industry's future.
In its viability plan filed last week, GM said a traditional Chapter 11
reorganization bankruptcy could cost more than $100 billion -- hurting
sales as consumers reject GM products and causing turbulence during a
process that could take years. But the automaker, which has resisted
bankruptcy and emphasized its risks, also said that other bankruptcy
scenarios could cost half that much.
For example, a prepackaged bankruptcy, in which GM and its stakeholders
would come to terms prior to the filing, could cost an estimated $45
billion. Under that scenario, GM estimates the impact on revenue would
be "quite severe near-term." However, the long-term consequences would
be "less severe" than a full-blown Chapter 11.
Some outside experts have argued that a court-supervised bankruptcy
would allow GM and Chrysler to more easily overhaul their debt and
But GM has resisted the idea, citing all the damage such a move could
cause to its sales and image. "Our primary efforts continue to be on
transforming our business and executing GM's viability plan outside of
bankruptcy court," GM CEO Rick Wagoner said last week.
As part of that effort, GM asked the government for as much as $16.6
billion on top of the $13.4 billion already loaned by the U.S. Treasury
under a deal cut in December. The automaker has presented a plan to
restructure the business that it said will let the automaker break even
Difficult process now harder
Under terms of the loans already issued, GM must try to reduce its
$27.5-billion debt by two-thirds and get the UAW to consider taking half
of the money it is owed as GM stock for retiree health care costs as
part of the VEBA, or voluntary employee beneficiary association.
It's a process made more difficult because it is not being done in
bankruptcy and the parties have to voluntarily agree. Bondholders have
said the process behind the scenes has been tough and have questioned
whether the union was getting a better deal and if the turnaround plan
goes far enough to ensure the automaker can be viable.
Prepackaged Chapter 11 "might end up being a possibility if you can't
get the bondholders to agree," Brad Coulter, a corporate finance and
turnaround management expert from Bloomfield Hills-based O'Keefe &
Associates, said Monday. "The handwriting is on the wall: If this
becomes an ugly bankruptcy, this thing is probably going to fail or it's
going to be ultraexpensive. That's kind of the motivating factor here."
A Wall Street Journal report Monday said that outside advisers at the
U.S. Treasury were trying to arrange at least $40 billion in financing
for bankruptcy loans for GM and Chrysler. The administration officials
have referred to the latest effort as due diligence in preparing for a
variety of options.
"The analysis does demonstrate, in our judgment, that restructuring is
best achieved outside the bankruptcy process," Fritz Henderson, GM
president and chief operating officer, told industry analysts last week.
"The issues are obviously revenue loss versus liability reduction
Added Henderson: "Any discussion of bankruptcy necessarily involves
simplifying assumptions, and most things in bankruptcy aren't simple,
and most of them involve delays."
Under a prepackaged scenario, GM said the company would negotiate deals
with bondholders and the union to swap debt for equity. The plan "would
be implemented in bankruptcy, binding 100% of the bondholders to accept
consideration equivalent to that contemplated in the out-of-court
exchange," GM said in its plans.
It also warned that the process could cause "a quite severe near-term
negative revenue impact during the bankruptcy proceeding and a less
severe, but still serious, long-term negative revenue impact after
exiting from Chapter 11."
A more aggressive option is called the pre-negotiated, cram-down plan
and calls for the automaker to seek a larger conversion of debt to equity.
GM said this scenario could take six months or more to complete and cost
up to $70 billion. GM also warned that dramatic changes to the VEBA
would be "vigorously contested, endangering resolution with the UAW and
potentially forcing the company into an extended traditional Chapter 11
or free-fall bankruptcy."
The most-extreme option listed was traditional Chapter 11 bankruptcy, a
process GM said could take 18 months to 24 months and result in
"catastrophic revenue reduction."
"The revenue impact during this type of bankruptcy would be very severe,
with a substantially delayed recovery time and significant potential for
permanent, significant damage," GM said. It added: "Indeed, there is
considerable doubt whether the company would survive this process."
GM said the process could cost $103 billion.
None are good options
"In any scenario, there is no ... financing available ... to a company
of General Motors' size on a private basis," GM's Henderson said. "So
the only possible source of ... financing would be the U.S. Treasury.
Otherwise, the company couldn't operate."
None of the bankruptcy options are good for GM, according to some
experts, such as Van Conway, a restructuring expert from
Birmingham-based Conway MacKenzie Inc. He said GM is too large to
successfully do a prepackaged bankruptcy, and that the other two options
would take a lot of time and money.
"You run the risk that you still don't make it," he said. "Plus, you run
the risk of some suppliers getting thrown into bankruptcy and then they
go out of business, and the guy who is selling you the door handle is
gone, and the new guy says, 'I want twice as much.' "