Saturday, November 29, 2008

Bankruptcy Could Offer GM More Flexibility

(WP) General Motors insists that bankruptcy would be a catastrophic way to solve its cash problems, but that hasn't stopped analysts and bankers from speculating about how a restructuring might shake out.

If Congress fails to bail out the auto giant, a prearranged bankruptcy deal might be the least onerous way to spread the pain among shareholders, bond holders, dealers and union members, analysts say. The federal government would probably still need to keep the company alive in a leaner form and reassure customers and creditors.

GM could negotiate concessions from bond holders and the United Auto Workers without filing for bankruptcy. But a J.P. Morgan report notes that a prearranged bankruptcy deal negotiated with major stakeholders before a bankruptcy court filing would also allow GM to break state franchise laws that limit the auto giant's ability to eliminate brands and shrink its extensive dealer network. A negotiated bankruptcy package might also be needed to impose tough terms on reluctant creditors.

"Everything is on the table" in a prearranged bankruptcy deal, said a Senate Democratic aide who spoke on condition of anonymity because he was not authorized to speak on behalf of his boss. "That's one of the big attractions. It provides flexibility that otherwise couldn't be there."

GM and its defenders argue that any prearranged bankruptcy would be damaging to its business, suppliers and creditors. "What it's intended to do is give someone time to get his house in order," said David E. Cole, chairman of the Center for Automotive Research. But it could also drive customers to competitors and "put the [parts] suppliers right off the cliff," he said. Many of those suppliers are also strapped for cash, he said.

J.P. Morgan's report estimated that the bleak outlook for the U.S. car market means that GM must find a way to cut $4.2 billion out of its cost structure just to break even starting in 2010. (The report assumes that a $17 billion bridge loan from the federal government might add $900 million a year to GM's annual interest costs.) To reach those savings, there are only a few places to look.

The automaker would probably seek new concessions from the United Auto Workers, hardly an easy task. The union recently issued a statement reminding the industry that its active and retired members "have already made enormous sacrifices in the 2005 and 2007 collective bargaining agreements."

One thing the UAW might offer is a temporary rollback in wages for the duration of the credit crisis, according to people close to the union who spoke on condition of anonymity because they were not authorized to make public statements. Investment analysts, however, say that more concessions will be needed. The last bargaining agreement gave GM permission to hire new workers at lower wages to bring down average salaries. But with the slumping auto market, GM isn't doing much hiring and average pay hasn't declined as much as expected.

The UAW might also need to accept a delay in a $7 billion payment GM is supposed to make in early 2010 into a health fund for retired employees. Some say the union does not need the money immediately to continue payments to retirees and that a delay would give the automaker some breathing room.

GM also needs to reduce its towering $43.3 billion debt burden and its $2.9 billion a year in interest costs. Holders of GM bonds, whose securities are selling at a small fraction of face value, would probably be forced to accept equity instead or smaller amounts of new bonds on different terms, financial experts say. "We think interest expense reduction is needed immediately for cash flow improvement, but GM simply needs to reduce overall leverage," the J.P. Morgan report says.

In a prearranged bankruptcy, GM could impose an agreement on all creditors if it obtained the support of half of its creditors holding two-thirds of its debt, restructuring experts say. The holders of GM debt are probably banks and investment firms, many of which might also hold credit default swaps that might be liquidated in a negotiated deal.

GM might also be forced to eliminate some of its lagging brands and use a bankruptcy package to circumvent state franchise laws that limit changes GM can make in its extensive dealer network.

"Among the challenges GM has is too many brands," said Maryann Keller, an automotive analyst and author of a book on GM. "It can't shut them down because of existing obligations to dealers where state franchise law prevails."

To meet state franchise restrictions, she said, GM spent more than $2 billion to eliminate the Oldsmobile brand. A Senate Democrat involved in deliberations on the auto industry bailout proposal said that 38 states have franchise laws that make it hard to close dealerships.

None of this lets the federal government off the hook. In the absence of new private credit for GM, the federal government would still need to inject money into the auto giant, probably in return for several billion dollars of preferred shares, while GM restructures and waits out the downturn.

That is all bad news for current shareholders. While they would be wiped out in an unplanned bankruptcy, a prearranged package would still dilute their stake to much tinier levels.

GM, Ford and Chrysler continue to lobby Congress for a $25 billion loan program to steer them through the economic slowdown and credit crisis to 2010. They argue that by then, new union contract provisions, new vehicle models and a better economy will make them profitable again.

In addition to talking to members of Congress, who want evidence that the company has a plan for viability, GM has been talking to UAW representatives, outside lawyers and Georgetown Law School professor Daniel K. Tarullo, a key member of President-elect Barack Obama's transition team.

People familiar with the talks say that the coming week will be critical. The Detroit automakers are due to make their case to Congress for $25 billion in new assistance. It will also be closer to the time that GM might start running short of cash, according to some analysts.

Bondholders are already expecting the worst. GM bonds due Jan. 15, 2011, with a 7.2 percent coupon were selling at 27 cents on the dollar on Wednesday, giving them an effective yield of 89.45 percent -- indicating a strong expectation of default or renegotiation.

While investors are discounting GM bonds, the full face value of the debt is still weighing down GM's balance sheet. In a prepackaged bankruptcy, GM could offer bondholders more than the current market value of bonds and more than bondholders might expect if the company landed in bankruptcy court without a deal. That would still remove most of the company's debt from its books.

There are other possibilities. Advocates of a merger between GM and Chrysler might try to revive that plan. The J.P. Morgan analysts say Congress might approve a short-term bailout to provide GM with enough cash to survive until Obama takes office in January, when he and a new Congress could devise a second, longer-lasting rescue package.

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