GM, Chrysler may face bankruptcy over U.S. debt
MIKE RAMSEY AND TIFFANY KARY
Bloomberg News
February 10, 2009
General Motors Corp. and Chrysler LLC may have to be forced into bankruptcy by the U.S. government to assure repayment of $17.4-billion (U.S.) in federal bailout loans, a course of action the auto makers claim would destroy them.
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 website. 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 last week.
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. The government would finance the bankruptcy with a so-called "debtor in possession" or DIP loan, a lender status that gives the U.S. priority over other creditors, said Don Workman, a partner at Baker & Hostetler LLP.
"They are negotiating to see if they can reach an agreement," said Mr. Workman, a bankruptcy lawyer based in Washington. "If not, they are saying 'We are pretty darn sure that a bankruptcy judge will allow us,' " to be first in line for repayment.
The auto makers have dismissed calls to reorganize under bankruptcy protection, saying a Chapter 11 restructuring would scare away buyers and lead to liquidation. They are working toward a Feb. 17 deadline to show progress on a plan put in place as part of the U.S. loans received in December from the Troubled Asset Relief Program. The companies must reduce labour costs and show how they will repay the money by next month.
GM and Chrysler are already trying to restructure out of court by cutting labour costs, reducing debt levels and eliminating dealers. GM is in talks to pare $27.5-billion in unsecured debt to about $9.2-billion in a swap for equity.
The company said it plans to shutter dealers and reduce obligations to a union retiree health fund by half to $10.2-billion in a separate equity swap. Chrysler chief executive officer Robert Nardelli has said his company will also try to cut debt.
GM said yesterday it's in negotiations to take back portions of Delphi Corp., a parts supplier the auto maker separated from a decade ago, in order to maintain portions of its supply chain. GM said it's also considering more plant closings, job eliminations and pay cuts for administrative workers.
In its restructuring plan, GM will include pay cuts for salaried employees, people familiar with the plan said yesterday.
The pay cuts will be in addition to firings of thousands of salaried workers to cut expenses, said the people, who asked not to be identified because the plans haven't been announced. Some of the details may be revealed this week, the people said.
"This is the reality of what they have to deal with," said Pete Hastings, a fixed-income analyst at Morgan Keegan in Memphis, Tennessee. "At this point, it's about survival."
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