Experts: GM bankruptcy is almost inevitable

• Source: Ce.cn
• [14:08 May 11 2009]
• Comments

"I don't think anyone is buying cars from a company who is wringing their hands about a potential bankruptcy for the past year or so," he said.

Under Chapter 11, a company can stay in operation under court protection while sheds debts and unprofitable assets to emerge in a stronger financial position.

At this point, GM needs to resolve the uncertainty and get in and out of bankruptcy as quickly as possible, Lubben said.

The company is talking with the UAW and Canadian auto workers unions about concessions, including getting the UAW to take roughly 39 percent of its stock in exchange for half of the $20 billion GM must pay into a union-run trust that will take over retiree health care payments next year.

About 50 percent of the stock would go to the government for its loans. GM said last week it would need another $2.6 billion in May and $9 billion more for the rest of the year, bringing the total to $27 billion.

One percent would go to current shareholders, with bondholders getting the other 10 percent.

Bondholders are reluctant to take the deal because the government and UAW are getting far bigger stakes in the company, said Kevin Tynan, an industry analyst for Argus Research in New York.
 
"When you look across at what the union is getting and what the government is getting, to expect them to take 10 percent is just unrealistic," he said.

Cutting dealers also remains a huge hurdle, with GM hoping to shed 2,600 of its 6,246 dealerships by 2010.

But dealers are protected by state franchise laws, and trying to shed them outside of bankruptcy would result in either millions of dollars in payments or multiple lengthy lawsuits, Lubben said.

"That means you've got to negotiate with each one of those dealers individually."

Also, GM on Friday told its major parts suppliers that it would move up payments due on June 2 to May 28.

Company spokesman Dan Flores said it was being done to help the suppliers at a critical time, but he denied that the payments were pulled ahead of a potential June 1 bankruptcy filing.

GM has begun to temporarily close 13 assembly plants for up to 11 weeks through mid-July in an effort to control inventory. With Chrysler plants also shut down during its bankruptcy proceedings, parts suppliers will soon have no income and could go under.

It would help speed up GM's stay in bankruptcy court if it could pull together big blocks of stakeholders to agree on reducing debt or changing other stakes, said Robert Gordon, head of the corporate restructuring and bankruptcy group at the Clark Hill PLC law firm in Detroit.

During its quest for government aid, GM executives said bankruptcy would severely cut their sales, with research showing that people would shy away from GM vehicles for fear that warranties would not be backed and parts would not be available.

Tynan said the executives now can't change their story, even though they likely know that bankruptcy is inevitable.

"They're sort of morally obligated to say 'we're intent on doing this outside of bankruptcy,'" he said. "But at the end of the day, they just want the magnitude of the restructuring to get done."

(Agencies)