GM, Chrysler May Accept Bankruptcy to Receive Bailout (Update5)
By James Rowley and Linda Sandler
bloomberg.com
Dec. 4 (Bloomberg) -- General Motors Corp. and Chrysler LLC executives are considering accepting a pre-arranged bankruptcy as the last-resort price of getting a multibillion-dollar government bailout, said a person familiar with their internal discussions.
Auto executives have warned bankruptcy would lead to liquidation as customers abandoned the companies. Staff for three members of Congress have asked restructuring experts if a pre- arranged bankruptcy -- negotiated with workers, creditors and lenders -- could be used to reorganize the industry without liquidation, a person familiar with that matter said.
“It’s essential for Congress to do due diligence on bankruptcy as an option so it gets a clear sense from independent people what the risks and possibilities are,” said Alan Gover of White & Case, who has been lead lawyer in $60 billion of corporate-debt restructurings.
Many solutions to the automakers’ financial problems are on the table in discussions in Washington and around the country among company officials, lenders, union officials and other interested parties, the person briefed on internal talks said.
Negotiations are splintered among small groups, making it unlikely a proposed solution such as bankruptcy would emerge until next week at the earliest, the person said.
Pelosi and Bush
House Speaker Nancy Pelosi and President George W. Bush are at odds about how to help automakers after both agreed that allowing them to enter bankruptcy is a bad idea. GM, Chrysler and Ford Motor Co. asked for $34 billion in bridge loans, about one- third larger than the $25 billion Energy Department loan program the White House has previously supported to finance more fuel- efficient cars.
General Motors fell 79 cents to $4.11 in New York Stock Exchange composite trading. The stock has plunged 80 percent this year. Ford fell 19 cents to $2.66. Chrysler is a privately held company.
GM Chief Executive Officer Rick Wagoner said today that bankruptcy is not in his plans. Such a filing would mean liquidation because customers would refuse to buy cars from a company that might not be able to back warranties or supply parts, he has said. Bankruptcy is “way down the list of options,” board member George Fisher said yesterday in an interview. GM spokesman Tony Cervone declined to comment beyond Fisher’s remarks.
‘Entirely Focused’
“We are entirely focused on our request before the federal government,” said Lori McTavish, a Chrysler spokeswoman. “All contingency planning is on hold until we know the result of the hearings.”
In a viability plan presented to Congress, Chrysler said a pre-arranged bankruptcy is “not plausible” and the “multitude of separate classes of holders of claims and interests” make a pre-petition solicitation from the automaker “highly unlikely to succeed.” Chrysler said a regular Chapter 11 bankruptcy filing would likely require $17 billion to $20 billion in debtor-in- possession financing for a single year to allow the company to continue to operate while under court protection.
GM and Chrysler told Congress Dec. 2 that they need $11 billion in government loans just to survive the year as the auto industry slump deepens. To get the money, the companies agreed to slash payrolls, shed brands and shrink dealerships. Bankruptcy wasn’t part of their plans.
Democrats’ Goal
United Auto Workers President Ron Gettelfinger told lawmakers today that a prepackaged bankruptcy is “simply not a viable option.”
Lynn LoPucki, who teaches bankruptcy law at Harvard University and the University of California at Los Angeles, said Democrats’ goal of preserving a U.S. auto industry is not doable without a bankruptcy.
“A workout requires everybody’s agreement,” LoPucki said. “If I own bonds, GM can’t force me to take less than 100 cents on the dollar outside of bankruptcy court. Bankruptcy is the only thing that can work because GM and the government need the ability to force people to go along with the plan. Paying everyone in full is prohibitively expensive.”
GM’s 8.375 percent bonds due in July 2033 fell 0.9 cent to 19.1 cents on the dollar yesterday, yielding 43.8 percent, according to Trace, the bond-pricing service of the Financial Industry Regulatory Authority.
Credit-default swaps on GM bonds were unchanged today at 77 percent upfront and 5 percent a year, CMA Datavision prices show. That means it costs $7.7 million in advance and $500,000 annually to protect $10 million of GM bonds from default for five years.
77 Percent
About 77 percent of billion-dollar companies survive bankruptcy, according to LoPucki’s database, while the others sell their business.
“Billion-dollar companies rarely go into bankruptcy and liquidate piecemeal,” he said.
The government could guarantee the warranties given to consumers on cars bought from a bankrupt automaker, said Mark Bane, a bankruptcy lawyer with Ropes & Gray in New York. Government money could also “ensure that parts suppliers will be paid,” he said.
Less government money would be needed in a prepackaged bankruptcy, which might last only two months, compared with two years or more for a regular bankruptcy, according to Bane. In a “prepack” restructuring, an automaker would go into court after reaching agreement with lenders, workers and suppliers on what each would give up and on the business plan to be followed.
‘Absolute Guarantee’
“If there’s an absolute guarantee from the government that they are going to provide debtor-in-possession financing,” bankruptcy could work, said Mike Jackson, CEO of car dealership company AutoNation Inc. “I would be surprised if they go that direction.”
Government aid might be needed only for the period during which the company is gaining consent from its constituencies -- which might take as long as six to 12 months, Bane said.
President-elect Barack Obama said lawmakers were right to demand that U.S. automakers provide a plan to sustain their businesses before getting federal aid, and that their latest efforts represent “a more serious set” of proposals than earlier ones.
Any assistance must be “based on realistic assessments of what the auto market is going to be and a realistic plan for how we’re going to make these companies viable over the long term,” Obama said yesterday.
Obama’s Team
A representative of Obama’s transition team earlier contacted at least one bankruptcy law firm to say Daniel Tarullo, a law professor at Georgetown University who heads Obama’s economic policy working group, would call to discuss the workings of a prepack, according to this person.
Tarullo referred questions on a prepack to the transition team press office. Turullo’s staff “has received a lot of calls and unsolicited advice,” and that didn’t necessarily mean that “we hold a position that someone else may have advocated,” transition team spokesman Tommy Vietor said Nov. 21.
Officials of the three automakers told members of Congress last month they had studied a pre-arranged bankruptcy, championed by Republican lawmakers such as Senator Bob Corker of Tennessee, before dismissing the idea as unworkable.
Taxpayers would be protected if automakers went through Chapter 11 proceedings because U.S. bankruptcy laws put everyone on an even footing, lawyers said. For instance, trade vendors out of court might insist on payment in 10 days instead of 60 days, and couldn’t do that in court, they said. Bankruptcy might also help automakers to get rid of some health and labor costs that burden them, they said.
“These Wall Street geniuses and law firms are coming up with all these solutions that make them a lot of money,” GM’s lead independent director, Fisher said. “The truth of the matter is that this is so complex, the what-ifs game has so many legs on it, I could spend the next 24 hours talking on the what-ifs.”
To contact the reporters on this story: Linda Sandler in New York at lsandler@bloomberg.net and; James Rowley in Washington at jarowley@bloomberg.net.
Last Updated: December 4, 2008 16:37 EST |
