Daily Auto News GM Bankruptcy Seen as Unavoidable Now
Daily Auto News
More than a thousand bondholders who own General Motors’ debt rebuffed the company’s last-ditch effort to avoid bankruptcy yesterday, letting a midnight deadline pass without comment. The move makes the largest bankruptcy in U.S. history virtually unavoidable, with formal bankruptcy proceedings likely to begin next week.
The Detroit News reports, “General Motors Corp. has failed to lure enough bondholders to swap debt for a 10 percent stake in the company, which pushes the automaker closer to a Chapter 11 bankruptcy filing.” The company had proposed to exchange $24 billion in debt for partial ownership of a restructured GM, but, the News reports, “The number of bondholders who agreed to the swap was substantially less than the 90 percent mandated by the U.S. Treasury Department.”
With bondholders unwilling to accept the deal, General Motors faces a deadline of Monday, June 1, to formally seek the protection of a bankruptcy court. The development does not surprise many industry observers. Peter Hastings, a credit analyst at Morgan Keegan, told Reuters, “This thing was dead on arrival, and we were just waiting for the doctor to pronounce it dead. Now that’s happened.”
The basic outline of the restructuring plan the company will submit to the court is already known. The Washington Post reports, “The United States and Canada would own nearly three-quarters of a restructured General Motors, effectively nationalizing the border-straddling industrial colossus as part of an overhaul plan that would put most of the rest of the company in the hands of a union trust fund.” The Post adds, “Sources said the plan, a bankruptcy reorganization proposal being drafted by the Obama administration, would require the U.S. government to lend GM about $30 billion on top of the $19.4 billion already invested, giving it the majority stake. Canada is preparing to lend about $9 billion for a smaller interest, the sources said.”
Many government officials are reportedly uncomfortable with the arrangement. The Post notes, “The government is taking on the ownership role at GM reluctantly, officials have said, adding that it is not intended as a permanent situation. Nonetheless, for the foreseeable future, the United States will have broad power over the company, including the ability to appoint board seats.”
Some analysts say the reorganization could work because of a path being blazed now by cross-town rival Chrysler. Bloomberg explains, “A restructured Chrysler is almost ready to emerge from bankruptcy and will do so closer to 30 days after its April 30 filing rather than the upper limit of 60 days previously estimated.” Meanwhile, “Chrysler’s May sales were similar to those in April, showing consumers have taken President Barack Obama at his word that he intends for a retooled company to survive.” Consumers may feel “optimistic that if GM goes through a similar process, warranties and service will be provided.”
But GM’s failure will likely feature more prominently in the media than Chrysler’s, and it remains to be seen what effect the press attention will have on consumer confidence.
A GM bankruptcy, the New York Times reports, “Would be perhaps the biggest and most-watched in legal history. Because of its size and scope, the bankruptcy would be the most complicated that any American company has gone through.” In fact, the case “will generate so much economic activity — like hotel bookings, restaurant dining and expanded office rentals — that Detroit is hoping that the case will be filed in the local bankruptcy court,” though corporate bankruptcies are most often handled in New York or Delaware. “Already,” the Times adds, “hundreds of lawyers from almost every major firm that handles restructuring work have spent months preparing the reams of documents that would be required for a bankruptcy filing by G.M., which had nearly $150 billion in global revenue last year, making its case bigger than Enron.”
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