Automakers Dismiss Bankruptcy; U.S. Won’t Rule It Out

By Keith Naughton and Alan Ohnsman

Feb. 18 (Bloomberg) -- General Motors Corp. and Chrysler LLC, seeking up to $21.6 billion in additional federal aid to survive, said bankruptcy may cost the U.S. five times as much.

The two automakers, in their most detailed exploration of bankruptcy, said it could cost taxpayers as much as $110 billion to finance the companies’ Chapter 11 restructurings. In separate filings to the Treasury Department yesterday, they said filing may lead to liquidation, potentially costing millions of jobs.

Bankruptcy “would create unbearable stress not only for our suppliers, but also the suppliers of other automakers,” Chrysler Chief Executive Officer Bob Nardelli said in a conference call with reporters. “It would have a cataclysmic effect on the entire auto industry.”

President Barack Obama’s chief spokesman refused to rule out the possibility of the automakers restructuring through bankruptcy.

“I wouldn’t preclude policy choices, particularly since we haven’t seen details,” Robert Gibbs told reporters before the plans had been submitted. The auto companies “represent a huge part of our manufacturing base, and to have a strong and viable auto industry is tremendously important for the future.”

GM outlined three scenarios for bankruptcy in a progress report required under federal loans. If automakers fail to show by March 31 how they will become profitable, the Treasury Department can recall the money or require it be used as bankruptcy financing.

Risk ‘Remains High’

Standard & Poor’s said in reports on GM and Chrysler today that the “bankruptcy risk remains high” for both companies this year and next.

“The threat is still there,” GM CEO Rick Wagoner said of the bankruptcy possibility in a Bloomberg Television interview today. “Our assumption is that we can get this done out of court and it’s better for everybody.”

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 earlier this month. If federal officials fail to get a consensual agreement to change their position regarding repayment, they have the option to force the companies into bankruptcy as a condition of more bailout aid.

Billions at Stake

GM estimated the government would have to contribute $36 billion to $86 billion to finance its bankruptcy, compared with the $22.5 billion to $30 billion in federal aid it’s seeking to restructure outside of Chapter 11.

Chrysler said it would need $25 billion in bankruptcy financing, more than twice what it’s seeking from the government in low-cost loans.

Bankruptcy specialists said the automakers’ analysis was too pessimistic and failed to recognize the benefits of bankruptcy to force creditors, dealers and unions to accept concessions.

Taxpayers also would get priority to be paid back first in a government-sponsored Chapter 11, said Nancy Rapoport, bankruptcy law professor at the University of Nevada, Las Vegas.

“I don’t see how it’s better for the taxpayer for the auto companies to do this out of bankruptcy,” Rapoport said. “Right now, you can’t trace what they’re doing with these funds. There’s no guarantee they’ll be paid back and I don’t see the taxpayer getting a priority.”

Feeling Stigma

The stigma of bankruptcy risk is already being felt at GM and Chrysler, said Douglas Bernstein, a bankruptcy lawyer with the Detroit-based firm of Plunkett Cooney PC.

“Neither of these companies is in bankruptcy today, but who is buying their vehicles?” Bernstein said. “If they filed for bankruptcy, they could try to build a sense of patriotism about helping American auto companies recover.”

Chrysler said Chapter 11 may ultimately lead to an “orderly wind down” of the company that leads to as many as 3 million lost jobs across the economy.

“It’s a non-starter,” Senator Carl Levin, a Michigan Democrat, told reporters yesterday, referring to a bankruptcy by either automaker. “The car company is not like the airline industry.”

GM cited a CNW Marketing Research survey in its filing yesterday showing 80 percent of potential car buyers would avoid a bankrupt automaker.

‘Blood in Pool’

“There will be blood in the pool: Everyone is going to want a severe discount to purchase vehicles from a bankrupt company,” said Dan Genter, president of Los Angeles-based RNC Genter Capital Management, which oversees a $2.7 billion bond portfolio, that doesn’t currently include GM or GMAC debt. “The bigger picture is what happens to all the dealers and suppliers?”

If the government doesn’t also bail out suppliers, which are requesting as much as $18.5 billion, bankruptcy for the automakers could be inevitable, Bernstein said.

“Bankruptcy is not a drop-dead failure,” Bernstein said. “A lot of what they’re doing now is no different than what they would do in bankruptcy.”

Given the size and complexity of the company’s operations, a bankruptcy proceeding won’t be quick or cheap, GM said in its report to the Treasury Department. The carmaker’s three bankruptcy scenarios include a “pre-packaged” Chapter 11 filing; a pre-negotiated “cram-down” plan and a conventional bankruptcy.

Under the first case, bondholders would have to vote in favor of any reorganization plan, and would require an advance agreement on how to handle Voluntary Employee Beneficiary Association liabilities.

The cost, including expenses related to Delphi Corp., may total $45 billion, including $36 billion of U.S. government financing, GM said.

‘Cram-Down’ Approach

The “cram-down” approach would include the company converting bonds and VEBA obligations to equity, and cost as much as $70 billion and take six months to complete, GM said.

A traditional Chapter 11 filing may take GM two years to emerge from bankruptcy protection and cost as much as $103 billion, the company said. Total U.S. government financing costs for such a move may be as much as $86 billion, GM estimated.

In its report, Chrysler estimated that the U.S. would lose 40,000 direct jobs at the company and 3,300 auto dealerships with 140,000 employees and that $7 billion in supplier invoices wouldn’t be paid. Some 31 million Chrysler vehicle owners may also lose warranties and service, the company said.

“The consumer is smart enough to know that a company in bankruptcy probably isn’t going to be able to keep providing all the training classes for different maintenance techniques,” said Genter. “They’ll wonder who will be able to do vehicle servicing.”

To contact the reporters on this story:
Keith Naughton in Southfield, Michigan at Knaughton3@bloomberg.net;
Alan Ohnsman in Los Angeles at aohnsman@bloomberg.net Sphere: Related Content