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Plan for GM may involve bankruptcy

Experts say a filing, with careful help from the government, could be the best thing for the automaker.

March 31, 2009|Ken Bensinger

The government's sweeping plan to reshape General Motors Corp. makes it increasingly likely that the struggling carmaker will enter bankruptcy, a possibility signaled Monday by President Obama.

Rather than a bad thing, an appearance before a bankruptcy judge could actually be the key to saving the deeply troubled automaker, experts on the auto industry and administration officials suggest.

A carefully controlled bankruptcy, they contend, would help free GM from crushing obligations to its bondholders, unions and other stakeholders. And that, in turn, could give the troubled giant the breathing room it needs to face perhaps its greatest challenge: reversing its cratering sales by making cars and trucks that more people want to buy.

"The government is laying the groundwork for a filing," said Itay Michaeli, industry analyst at Citi Investment Research, adding that the decision to do so could depend as much on "political will" as economic considerations.

Though the administration and GM say they're trying to avoid a bankruptcy filing, the fact that they're even discussing the possibility is a major shift.

The Detroit company had been unable to reach deals with bondholders and the United Auto Workers union by the government's original deadline of today, despite the threat that the government could require immediate repayment of the $13.4 billion in loans it previously extended GM. So Michaeli and other industry watchers argue that there is little hope of achieving progress in the final 60-day period that the administration said it would give GM before pushing it into court.

Though it would carry risks, a bankruptcy filing could accomplish what the company could not. For example, the government is considering using the bankruptcy process to split GM into two pieces, one consisting of GM's most promising "good" elements and the other of its "bad" weaker units and remaining debts, a senior administration official said.

"I think it's going to be a concerted effort. The government is going to hold GM's hand through the whole process," said Aaron Bragman, an auto industry analyst at IHS Global Insight.

On Monday, the president acknowledged progress made in recent months by GM and Chrysler, which has been asked to merge with Italian automaker Fiat or risk being cut off from further aid. But he also pointed to the automakers' remaining problems and their increasingly dire revenue picture.

GM sales have crashed, falling 23% in 2008; in the first two months of this year, they fell 51% while Chrysler's fell 49%. Meanwhile, administration officials said that sales projections GM laid out in restructuring plans it submitted to the government -- predicting a return to profit by 2012 -- were overly optimistic considering the economy and the reluctance of consumers to buy cars.

In response, the administration is asking GM to meet cost-cutting measures that are even more ambitious than those recommended in the terms of the original bailout loans, when it and Chrysler received a combined $17.4 billion.

Exact terms of the government's new demands were not revealed. But a senior official called previous requirements that GM remove $18 billion in unsecured debt and $10 billion in obligations to a retiree healthcare trust "insufficient" considering the current environment. The official, who spoke on condition of anonymity, suggested that GM would also need to force concessions from the United Auto Workers union on labor costs and to radically reduce its number of franchise car dealers.

That official said that GM would effectively get a final, two-month shot -- along with a limited, unspecified amount of capital -- to get all that done. If not, the government would escort it to court for a "surgical" bankruptcy proceeding that it says would last only 30 days.

Under bankruptcy law, a judge would have the power to alter the contracts underpinning those relationships, and even to wipe out bondholders completely. That would effectively reduce or eliminate the company's debts.

Thus unencumbered, GM could, in theory, turn its focus to producing vehicles that best compete with offerings from such rivals as Toyota Motor Corp. and Honda Motor Co., rather than praying that car buyers will return to the high-margin SUVs and pickups they abandoned last summer.

But a bankruptcy would carry significant risks, including the possibility that consumers would choose not to buy cars from a company in that position. The administration has moved to quell such concerns by establishing a warranty guarantee program on new GM and Chrysler cars purchased while the companies are restructuring.

On Monday, Obama spoke to such concerns. Describing bankruptcy as a "tool that we can use," the president praised the option as a way to "quickly clear away old debts" that would help GM, as well as Chrysler, "get back on their feet and onto a path to success."

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