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General Motors at the Eleventh Hour

Once unthinkable, bankruptcy filing now seems inescapable.

by on May.31, 2009

Ex GM Chairman Rick Wagoner, center, Retiring GM Vice Chairmen Bob Lutz, left, and CEO Fritz Henderson

Even a bankruptcy filing does not guarantee GM's survival.

While neither General Motors Corporation nor the U.S. Treasury Department are commenting on events of this weekend, it appears that General Motors is still heading towards declaring bankruptcy on Monday, one of the only alternatives left open in its bid for survival. Even a bankruptcy filing does not guarantee its survival.

Nonetheless, the company has completed several more steps in its restructuring, including a tentative agreement to sell a majority stake in Opel, thereby obtaining German government financial aid, and getting more bondholders than previously to accept equity for debt.

GM’s Board of Directors has been meeting to discuss a Chapter 11 filing, as well as the response to the government’s latest proposal to debt-holders, who were given until 5 PM Saturday to either swap equity for a stake in a restructured GM or take their chances in court.

Subscribe to TheDetroitBureau.comGM spokesman Tom Wilkinson said the automaker “doesn’t discuss the actions of its board,” but he confirmed that CEO Fritz Henderson is planning to hold a news conference “after the president speaks.” President Barack Obama is expected to make a statement about the ailing automaker on Monday morning before departing on a trip to the mid-east to try and broker a deal that would end a bankrupt peace process.  

On April 30th, the President made a similar address to the nation to reveal that Chrysler was going into bankruptcy – and to say that the government was confident it would be able to survive the process. In fact, the Chrysler bankruptcy was being filed as the President spoke. Since then Chrysler has been making rapid progress through its proceeding, and it could emerge from court protection in June.

“I think we could expect reassurance from the Obama Administration, the same sort of speech he made after the Chrysler bankruptcy filing,” GM Vice Chairman Bob Lutz said, on Thursday.

Like Chrysler, GM went to Washington seeking billions of dollars in federal aid, late last year, as the Bush economy skidded deep into recession and the U.S. auto market slid to its lowest levels in four decades.

When Congress failed to come up with a bailout package, the outgoing Bush Administration , overwhelmed by the breadth and depth of a global crisis caused by unregulated  U.S. finance capitalism, offered a temporary aid package, but passed onto the incoming Obama White House the challenge of whether to expand that with additional federal loans.

After reviewing the initial turnaround plans submitted by the two makers, the President’s Auto Task Force rejected further aid. Instead, it gave Chrysler 30 days to work out a marriage with Italy’s Fiat SpA, concluding it was not viable as a stand alone company.  GM was given until June 1 to improve its viability plan, by going faster and deeper with cuts to overhead, and revised deals with  unions and creditors.

Next week U.S. Judge Arthur Gonzalez is expected to approve the sale of Chrysler’s productive assets to Fiat. Chrysler has sailed through the Chapter 11 process much more quickly than anticipated by pundits, and barring an unexpected setback, should emerge this coming month stripped of virtually all its debt, and with labor contracts that are expected to put its production costs on a par with its import rivals. The United Auto Workers Union will be its largest shareholder, but the governance structure of the New Chrysler Group, dictated by the White House, effectively puts Fiat in charge. Over time Fiat will control the largest amount of New Chrysler stock.

As for GM, a number of key steps have fallen into place, including massive concessions in revised contract from the UAW and Canadian Auto Workers. Meanwhile, the German government on Friday announced it had successfully brokered the sale of a controlling interest in GM’s foundering European subsidiary, Opel, to a consortium led by the Canadian auto parts giant, Magna International and Russian auto and financial interests.

The major issue for GM, however, has been getting bondholders to agree to a bailout. Initially, they were offered 10% of the “new” GM’s equity in exchange for more than $27 billion of debt. The Treasury Department then offered to sweeten that package, but set a Saturday evening deadline. It appears that various debt-holders representing about 35% of that $27.2 billion have so far agreed to Treasury’s demands, and there are reports others may have signed on by Saturday, including Elliott Management Corporation, a $13 billion hedge fund and major GM bondholder, which reportedly acquiesced. Treasury wanted at least 50% of the bondholders to agree, which would  help quicken the bankruptcy process.

However, the lack of any news from Washington suggests that there was still a shortfall in the number approving the package, or that there are other snags that must first be ironed out. What happens next is anything but certain.

“It could be complicated,” said analyst Joe Phillippi, of AutoTrends Consulting, “far more so than at Chrysler.”

Where the smaller maker is essentially a U.S.-based brand, Phillippi noted, with only minimal operations abroad, GM is a truly global manufacturer. The Opel sale was only one of the many entities, contracts, and agreements that need to be dealt with before or during a U.S. bankruptcy filing.

One question so far unanswered is how GM would approach its court-ordered restructuring. It is widely assumed that it will file under Chapter 11 of the U.S. Bankruptcy  Code and pursue a so-called Section 363 sale. Effectively, it will take only the assets worth keeping and sell it to a new entity that will become a restructured GM with U.S. taxpayers owning 72.5% of the “New GM. ” Bondholders would be compensated by the old GM getting a percentage of the stock and cash from the government.

At the very least, the psychological impact of Bankruptcy will be deep, acknowledged Lutz. “For our competitors, a filing is going to be positive,” said the septuagenarian executive, who is phasing out of his role as GM’s head of product development.

“It will have a momentary, negative impact on (GM’s already depressed) sales, which are down almost 50%. “Consumers kept flying on bankrupt airlines, but that’s different from a bankrupt car company. A ticket is a couple hundred dollars. A vehicle is $25,000 or $35,000,” Lutz told the Automotive Press Association last Thursday in Detroit.

That’s one of the key reasons, Lutz added, “Our assumption is that if we go through court proceedings, everyone would have an incentive to get in and out as quickly as possible.”

Actually, there might be some who would hope to drag the process out hoping to either negotiate a better deal or get the courts to approve one. But if Chrysler’s Chapter 11 experience is any example, the outcome is almost pre-ordained. Judge Gonzalez has done little to alter the carefully crafted reorganization scripted by Chrysler, Fiat and the White House. No one thus far has come up with even a slightly comparable plan.

One big difference in a GM bankruptcy is that there will be no foreign maker coming in as a white knight. Existing shareholders would be the big losers, with their current equity all but worthless. On Friday, the last day of trading before the apparent bankruptcy, GM shares hit a 100-year low, at just 75 cents. Its 52-week high was $21.37 and, as recently as 2007, it was trading in the $40 range.

There will be other losers, as well. GM officials recently announced plans to terminate the franchise agreements of 1,100 dealers – and another 500 will be dropped when the company closes  or sells brands Hummer, Saturn, Saab and Pontiac. There had been strong resistance to the plan and the threat that dealers would try to reverse the decision in court. If it goes into Chapter 11, observers expect the automaker will seek formal approval from the court to complete its retail reduction and may even add to the dealer count it wants to shed.

Perhaps the biggest question that will remain, assuming GM goes into bankruptcy and emerges as what Lutz called a “small, lean and fast-moving” automaker, is how U.S. taxpayers will fare. So far, they’re on the hook for about $20 billion loaned to the “old” GM. According to details revealed by the Treasury and GM in recent days, they could be in for $50 billion more before the restructured automaker can prove whether it’s viable or not.

There is at least one positive precedent: when Chrysler survived its prior brush with bankruptcy, back in the early 1980s, it eventually paid off warrants issued to the government in return for a multi-billion-dollar loan guarantee. Treasury made a significant profit on the deal.

Ken Zino contributed to this story.

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One Response to “General Motors at the Eleventh Hour”

  1. Jodie says:

    I ask you today How many people are happy with this bailout? Except those top Paid execs at GM nobody is not even its workers!