GM, Chrysler weigh bankruptcy scenarios -- and reject them

THE AUTO INDUSTRY BAILOUT

GM, Chrysler weigh bankruptcy scenarios -- and reject them

Dave Guilford
and Bradford Wernle
Automotive News
February 18, 2009 - 12:01 am ET

GM COO Fritz Henderson
Photo credit: GLENN TRIEST

DETROIT -- General Motors and Chrysler LLC included bankruptcy scenarios in the viability plans they submitted to the federal government on Tuesday -- but both companies continue to reject the option.


The automakers said the cost to the federal government would greatly exceed that of the current bailout program.

"We believe bankruptcy would be a highly risky and highly costly process," GM CEO Rick Wagoner said at a press conference this evening. "The best bet remains to restructure outside of bankruptcy court."

Likewise, Chrysler CEO Bob Nardelli said in a teleconference that bankruptcy reorganization "is not the course of action we're recommending. We're absolutely confident we can succeed."

So far, GM already has received $13.4 billion in federal loans; the company now seeks an additional $9.1 billion in loans, plus a $7.5 billion line of credit.

Meanwhile, Chrysler has received $4 billion of the $7 billion it requested in December. Now Chrysler says it needs an additional $2 billion, for a total of $9 billion. Both companies cited deteriorating auto sales as a major drain on cash flow.

GM COO Fritz Henderson said bankruptcy would add expense to the bailout because the federal government would have to provide debtor-in-possession financing -- the money used to operate a company during bankruptcy. Although such financing usually comes from private sources, that would be impossible in the case of a company of GM's size, Henderson said.

GM presented three bankruptcy scenarios:

• A pre-packaged Chapter 11, which would require advance approval of debtholders for a debt-reduction deal. Likewise, it would require the UAW's advance approval of a debt-for-equity swap for money owed to the UAW's health-care fund for retirees.

Henderson said this would take about 60 days and cost the federal government $9 billion more than an out-of-court restructuring.

• A pre-negotiated "cram-down" plan, in which GM would seek tougher terms from creditors and the UAW. Because the more aggressive plan would spur a fight with creditors, it could take 90 to 180 days. It would cost $20 billion to $30 billion more than an out-of-court settlement, Henderson said.`

• A traditional Chapter 11 bankruptcy would take 18 to 24 months and cost $50 billion to $60 billion more than an out-of-court deal, according the Henderson. Plus, Henderson said, sales would "fall off a cliff" because consumers would lose confidence.

Nardelli said Chrysler submitted a plan for an orderly bankruptcy because "we were required to include a scenario for what would happen if Chrysler failed." He described the plan as "an orderly wind-down of all operations through court-supervised liquidation."

Nardelli said a liquidation would cost taxpayers a lot more than a successful out-of-court restructuring with a $9 billion loan. If Chrysler reorganized in Chapter 11, according to the company plan, it would require $24 billion in debtor-in-possession financing over two years.