GM, Chrysler May Get Bankruptcy to Protect U.S. Loans (Update1)
Feb. 9 (Bloomberg) -- General Motors Corp. and Chrysler LLC may have
to be forced into bankruptcy by the U.S. government to assure repayment
of $17.4 billion in federal bailout loans, a course of action the
automakers claim would destroy them.
U.S. taxpayers currently take a backseat to prior creditors, including
Citigroup Inc., JPMorgan Chase & Co. and Goldman Sachs Group Inc.,
according to loan agreements posted on the U.S. Treasury’s Web site. The
government has hired a law firm to help establish its place at the front
of the line for repayment, two people involved in the work said last week.
If federal officials fail to get a consensual agreement to change their
place in line for repayment, they have the option to force the companies
into bankruptcy as a condition of more bailout aid. The government would
finance the bankruptcy with a so-called “debtor in possession” or DIP
loan, a lender status that gives the U.S. priority over other creditors,
said Don Workman, a partner at Baker & Hostetler LLP.
“They are negotiating to see if they can reach an agreement,” said
Workman, a bankruptcy lawyer based in Washington. “If not, they are
saying ‘We are pretty darn sure that a bankruptcy judge will allow us’”
to be first in line for repayment.
GM shares traded in Germany rose 2.5 percent to the equivalent of $2.91
as of 12:07 p.m. in Frankfurt. Ford Motor Co., the second-largest U.S.
carmaker, advanced 0.5 percent to $1.95. Ford has declined government
bailout funds so far.
GM and Chrysler have dismissed calls to reorganize under bankruptcy
protection, saying a Chapter 11 restructuring would scare away buyers
and lead to liquidation. GM and Chrysler are working toward a Feb. 17
deadline to show progress on a plan put in place as part of the U.S.
loans received in December from the Troubled Asset Relief Program. They
must reduce labor costs and show how they will repay the money by next
GM and Chrysler are already trying to restructure out of court, cutting
labor costs, reducing debt levels and eliminating dealers. GM is in
talks to pare $27.5 billion in unsecured debt to about $9.2 billion in a
swap for equity.
The company said it plans to shut dealers and reduce obligations to a
union retiree health fund by half to $10.2 billion in a separate equity
swap. Chrysler Chief Executive Officer Robert Nardelli has said his
company will also try to cut debt levels.
GM said today it’s in talks to take back parts of Delphi Corp., a parts
supplier the automaker separated from a decade ago, in order to maintain
portions of the supply chain. The automaker is also considering
additional plant closures, job eliminations and pay cuts for
administrative workers, a GM official said.
The automaker probably will close at least two factories and Chrysler
will temporarily shut three, the Wall Street Journal reported, citing
people familiar with the matter. The General Motors closures may include
a truck plant in Pontiac, Michigan, and the Chrysler shutdowns will be
in Michigan and Canada, the newspaper said.
January sales from automakers plunged 55 percent at Chrysler, 49 percent
at GM and 40 percent at Ford.
The government has the option of working out an intercreditor agreement
outside of bankruptcy that would give it rights to some collateral ahead
of other creditors. Such agreements, often made when money is lent to a
company that already has liens on most of its assets, are usually
negotiated when the loan is made.
U.S. Law Firm
Cadwalader, Wickersham & Taft LLP is advising the government on how to
make sure it gets paid back first, including by way of intercreditor
agreements, the people involved with the talks said. The law firm, hired
last month, is working for the government with Sonnenschein, Nath &
Rosenthal, a Chicago-based firm with capital-markets experience, and
Rothschild Inc., an investment bank, the people said.
The issues are “extremely complex,” said Bruce Clark, a credit analyst
at Moody’s Investors Service.
The existing loan agreements appear to give the banks a superior
position to the government, Clark said.
“The ultimate position of the government could end up being determined
by whatever concessions various creditors make, and the determination of
a bankruptcy court if it ever gets there,” he said.
When the automakers were lobbying the government for assistance,
lawmakers made a point of saying that the government must be assured
that if the companies failed, taxpayers wouldn’t lose the investment.
Workman said the U.S. couldn’t force its loans to supersede existing
secured lenders, so it built in a measure that allowed the debt to be
converted to debtor-in-possession financing.
“A carrot and stick approach is spot on,” he said.
As it stands, the government loans fall below existing debt secured by
most assets for Auburn Hills, Michigan-based Chrysler and Detroit-based
GM. Prior lenders have first position on some assets. The government has
first position on assets not already pledged.
Chrysler has $7 billion in loans from a group of banks, including New
York-based JPMorgan, Goldman Sachs and Citigroup. It also has $2 billion
in loans from owners Cerberus Capital Management LP and Daimler AG.
Cerberus owns 80.1 percent of Chrysler. Daimler owns the remainder.
GM has $6 billion in loans secured by assets from lenders including
JPMorgan and Citigroup. JPMorgan spokesman Brian Marchiony, Goldman
Sachs spokesman Michael Duvally and Citigroup spokeswoman Danielle
Romero-Absilos declined to comment.
Lori McTavish, a spokeswoman for Chrysler, declined to comment beyond
confirming the primacy of the bank loans. GM spokeswoman Renee
Rashid-Merem and Treasury spokesman Isaac Baker declined to comment.
Unless the automakers show by March 31 that they will be able to return
to profit and repay the money, the government can demand return of the