GM explores various options for bankruptcy
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 Chrysler LLC.
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 contracts.
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 in 2011.
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 potential."
Added Henderson: "Any discussion of bankruptcy necessarily involves simplifying assumptions, and most things in bankruptcy aren't simple, and most of them involve delays."
Some alternatives
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.' "