GM, Chrysler May Face Bankruptcy to Protect U.S. Debt

[barbarian]

By Mike Ramsey and Tiffany Kary

Feb. 9 (Bloomberg) -- 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 in federal bailout loans, a course of action the automakers 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 Web site. 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 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.

GM fell 1 cent to $2.83 in New York Stock Exchange composite trading. Chrysler isn’t publicly traded.

Carmaker Opposition

The automakers 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 labor 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 labor 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.

Delphi Talks

GM said today it’s in negotiations to take back portions of Delphi Corp., a parts supplier the automaker separated from a decade ago, in order to maintain portions of its supply chain. GM said it’s also considering more plant closures, job eliminations and pay cuts for administrative workers.

The automaker probably will close at least two factories, which according to the Wall Street Journal may include a truck plant in Pontiac, Michigan.

Chrysler will temporarily shut three plants, the company said last week. Those closures will be in Michigan and Canada.

January sales from automakers plunged 55 percent at Chrysler, 49 percent at GM and 40 percent at Ford Motor Co., the second-largest U.S. automaker. Ford has declined bailout funds.

The U.S. government has the option of working out an intercreditor agreement outside of bankruptcy that would give it rights to some collateral ahead of others. Such agreements, often made when money is lent to a company that already has liens on most of its assets, are usually negotiated when the loan is made.

U.S. Law Firm

Cadwalader, Wickersham & Taft LLP is advising the government on how to make sure it gets paid back first, including by way of intercreditor agreements, the people involved with the talks said. The law firm, hired last month, is working for the government with Sonnenschein, Nath & Rosenthal, a Chicago-based firm with capital-markets experience, and Rothschild Inc., an investment bank, the people said.

The issues are “extremely complex,” said Bruce Clark, a credit analyst at Moody’s Investors Service.

The existing loan agreements appear to give the banks a superior position to the government, Clark said.

“The ultimate position of the government could end up being determined by whatever concessions various creditors make, and the determination of a bankruptcy court if it ever gets there,” he said.

When the automakers were lobbying the government for assistance, lawmakers made a point of saying that the government must be assured that if the companies failed, taxpayers wouldn’t lose the investment.

Existing Lenders

Workman, who isn’t involved in the negotiations, said the U.S. couldn’t force its loans to supersede existing secured lenders, so it built in a measure that allowed the debt to be converted to debtor-in-possession financing.

“A carrot and stick approach is spot on,” he said.

As it stands, the government loans fall below existing debt secured by most assets for Auburn Hills, Michigan-based Chrysler and Detroit-based GM. Prior lenders have first position on some assets. The government has first position on assets not already pledged.

Chrysler has $7 billion in loans from a group of banks, including New York-based JPMorgan, Goldman Sachs and Citigroup. It also has $2 billion in loans from owners Cerberus Capital Management LP and Daimler AG. Cerberus owns 80.1 percent of Chrysler. Daimler owns the remainder.

GM has $6 billion in loans secured by assets from lenders including JPMorgan and Citigroup. JPMorgan spokesman Brian Marchiony, Goldman Sachs spokesman Michael Duvally and Citigroup spokeswoman Danielle Romero-Apsilos declined to comment.

Lori McTavish, a spokeswoman for Chrysler, declined to comment beyond confirming the primacy of the bank loans. Treasury spokesman Isaac Baker and GM spokeswoman Renee Rashid-Merem declined to comment. GM Vice Chairman Bob Lutz will retire at the end of 2009, the company said today in a separate statement.

Unless the automakers show by March 31 that they will be able to return to profit and repay the money, the government can demand return of the loans.

To contact the reporters on this story: Mike Ramsey in Southfield, Michigan, at [email protected]; Tiffany Kary in U.S. Bankruptcy Court in New York at [email protected].

Last Updated: February 9, 2009 16:23 EST

http://www.bloomberg.com/apps/news?p...XXo&refer=home

[vztrt]

Thats not good for them

[RSgerry]

Originally Posted by vztrt

Thats not good for them

Agreed. It isnt good for anybody. Firstly, there will be a lot of people laid off. That is a lot of lives ruined. Second, competition keeps Ford on their toes. If GM build something, then Ford need to match or better it, and so on. Not sure why barbarian gave this a thumbs up...maybe mass job losses are fun?

[mik]

not good for parts suppliers either......

[vztrt]

Originally Posted by mik

not good for parts suppliers either......

That also means that Ford is gonna have trouble.

[Iggypoppin']

Ohio xb can we hear your thoughts on this? You've shown yourself to be very knowledgable with this sort of thing?

[Mr Brooksy]

Firstly, was that spell checked before publishing? I had to read sections two to three times. Maybe US journalists don’t have to know how to spell.

Secondly, with all this bad press about the US car makers, surely this is making 'potential' buyers scared. I mean who would want to buy a GM, Chrysler and by extension a Ford if (if the press is to be believed) the companies probably wont exist in a year or two?

[barbarian]

its a dog eat dog world..

getting rid of competition is one of core pillars of capitalism and hence the reason why i am happy :

[vztrt]

Originally Posted by barbarian

its a dog eat dog world..

getting rid of competition is one of core pillars of capitalism and hence the reason why i am happy :

Ford have said if Chrysler or GM go down its gonna cause big problems for them as they share parts manufactures. So that would mean massive problems for Ford. So this isn't something to be happy about.

[EgoFG]

Originally Posted by vztrt

Ford have said if Chrysler or GM go down its gonna cause big problems for them as they share parts manufactures. So that would mean massive problems for Ford. So this isn't something to be happy about.

While I have in the past thought that, I now think it politically motivated spin.

If GM shut shop, it does not kill the demand for cars - the Pie is just as big.
All remaining manufacturers will divide up the bit o' pie that GM had.
Assuming that the amount of cars sold and built in USA does not decline as a result of GM going belly-up, then the parts supply chain will be just as solid as now.
So the real issue is if imports pick up the slack, or if local manufacturers do.

I would imagine, unlike in Aus, most mass produced cars sold in USA are manufactured in USA.

[ebxr8240]

Sheesh G.M will be Daewoo ??

[Dave R]

If GM and Chrysler stop producing cars for a period of time, Ford will go bankrupt as its suppliers start folding up. I do think that Chrysler should go though, just to get rid of the over-capacity in the US industry.

[TUF_302]

Although im blue blooded all the way its not good to see this happening, as said above without the other two Ford would struggle big time!

[RSgerry]

Originally Posted by barbarian

its a dog eat dog world..

getting rid of competition is one of core pillars of capitalism and hence the reason why i am happy :

GM have announced today that they are going to shed 10,000 jobs worlwide.i dare you to go up to any of tose affected families and do a happy dance to them...

[Ohio XB]

Originally Posted by SLWXR6

Ohio xb can we hear your thoughts on this? You've shown yourself to be very knowledgable with this sort of thing?

Wow, thank you for your vote of confidence. I am kinda in the thick of things and try to keep on top of what's going on, so that is the reason for having a clue on these things. I still don't know everything though.


This paragraph blows me away....


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 in federal bailout loans, a course of action the automakers claim would destroy them.


Ok the Gov't has to FORCE them into bankruptcy, an action that would likely destroy the companies, in order to assure that the Gov't can be paid back.............yeah, ok. I guess this is something you have to have a degree in brainwashed economics to understand?

I understand that the Gov't wants to be put first in line to be paid back since it is tax payer's dollars, but there are already existing creditors ahead of them in line. Requiring that the companies take action that will cause them to collapse in order to put the tax payer first doesn't seem like a prudent course of action......since the whole idea of loaning them the money was to assure their success. Typical political stupidity.




As far as the suppliers going under if GM goes under and how that affects Ford, it is not necessarily true that they will just sell more parts to other companies since people will still be buying cars. Here's why.

Though it is true that the suppliers to the Big3 also supply parts to Japanese auto makers, they are not a big portion of their business. When the Japanese auto makers came to build assembly plants in the US they also brought many of their Japanese suppliers over here with them. I believe that the majority of the parts supplied to the Japanese auto makers are other Japanese companies that have located to the US. They have some US suppliers that, at minimum, are good to have for public relations purposes. There may be some US companies that also provide parts that the Japanese auto makers could not get Japanese producers to come to America to make.

So there is a certain divide of suppliers between the US and Japanese auto makers. Some suppliers are shared, but there is also a good sized portion of exclusivity. Some of the shared suppliers are so significant that even Toyota has stated that if GM and Chrysler crash it will have a serious negative impact on Toyota.




As far as mispellings, they usually make me cringe. I hate it too, but I didn't have anything jump off the page at me, though I see it all the time in articles I read. It might be because your English is derived from "The Queen's" English and our English has been knackered by being blended with so many other languages into what we call "American English?" You know, the whole "colour/color" thing.


Steve

[Wally]

There's more to the problem than just assuming parts suppliers will transfer production to a smaller group of car makers. There would be delays in extra tooling, delays in instruments of agreements, extra infrastructure, etc. Those delays could seriously affect stock levels, which will have a knockon effect to point of sale viability.


Putting a company in chapter 11 doesn't spell the end of a company, it merely suspends market manipulation providing a "safe harbour" whereby the debtor can continue trading while working up a new business plan, organise finance, sell assets, etc. It's chapter 7 that is the death sentence.

[Ohio XB]

Originally Posted by Wally

There's more to the problem than just assuming parts suppliers will transfer production to a smaller group of car makers. There would be delays in extra tooling, delays in instruments of agreements, extra infrastructure, etc. Those delays could seriously affect stock levels, which will have a knockon effect to point of sale viability.


Putting a company in chapter 11 doesn't spell the end of a company, it merely suspends market manipulation providing a "safe harbour" whereby the debtor can continue trading while working up a new business plan, organise finance, sell assets, etc. It's chapter 7 that is the death sentence.

You are very accurate on your point about the additional logistics involved in a change of suppliers. For Ford, even if a supplier moves a piece of tooling 2 cm it has to be completely recertified and test run for repeatability and quality. I believe that takes several days to a week or two.


You are also correct on what Chapter 11 is, but if Ford or Holden were in even Chapter 11 bankruptcy, or it's equivalent, in Australia, would Australians be weary of a company that may not be around for the vehicle's warrantee? Would they buy a car from a company that is in such dire straights that they need bankruptcy protection which they may or may not be able to emerge from? Will that company's focus be as good as it needs to be on quality or will it be on cost cutting and cutting corners?

Americans are very weary about things like this, the uncertainty. As a matter of fact sales at GM and Chrysler were affected by just the talk of needing loans. This is reflected in, and credited for, Ford gaining market share in November, December, and January even though sales are dismal. It is said that people that would have bought a GM or Chrylser product bought from Ford instead since they want to buy a US brand vehicle. With Ford being in the best position they bought a Ford instead.

This was just with the loans. Imagine the companies filing chapter 11 "bankruptcy". That word carries a lot of weight. I also must say that a lot of Americans don't know the difference between chapter 11 and chapter 7, or 13.



Steve

[max_torq]

I guess the government was always very dubious about the car companies claims that they remain viable. So if they collapse despite the taxpayers money, and that money just goes straight to the bank, without creating jobs, then the taxpayers, and their representatives, will be very reluctant to ever support any other attempted corporate bailouts.

[Wally]

Steve we have no provision in Australia for rehabilitation of a company provided for in your Chapter 11.

The closest we have is voluntary administration.

Of course while it may offer safe harbour, I understand Ch11 is generally used by executives to finish milking the company and pension funds dry, without having pesky creditors and labour unions on their backs.

[Iggypoppin']

a good read as always Steve. I asked for your opinion as you are directly involved in a way that sheds light on these issues faced by the big 3. As a favour, could you possibly explain chapter 11, 7, and 13 bankruptcy so as to better understand your posts? Cheers mate.

[svo supporter]

While I didn't read every word written there, but didn't Chrysler America sign an agreement with another car manufacturer to help keep afloat? I'm sorry I can't remember the manufacturer or the details of this agreement, but I'm sure it did occur

[Ohio XB]

Originally Posted by svo supporter

While I didn't read every word written there, but didn't Chrysler America sign an agreement with another car manufacturer to help keep afloat? I'm sorry I can't remember the manufacturer or the details of this agreement, but I'm sure it did occur

Chrysler had about a 35% acquisition by Fiat. It could become a larger investment. I don't believe there was an exchange of money for this percentage, just an agreement for Chrylser to be able to benefit from Fiat's small car platforms and market share in Europe.



Here's where you can read up on the various bankruptcy chapters....

http://www.usfmgroup.com/index.php/B...Explained.html

Chapter 7, 11, and 13 are summarized on that page so none of them are a long read.


max_torq, I believe you are correct. If this gets screwed up the poeple will be against ever doing it again.

Wally, the example you gave has been done many many times in Chapter 11. The workers usually lose out and the top brass retire.




Steve

[Wally]

Steve, I have had the unsavoury taste of being fleeced by a con artist hiding behind CH11. He stripped people of millions and got away with it...., much like the executives in the US are doing as we speak.

[SB076]

Originally Posted by Ohio XB

Chrysler had about a 35% acquisition by Fiat. It could become a larger investment. I don't believe there was an exchange of money for this percentage, just an agreement for Chrylser to be able to benefit from Fiat's small car platforms and market share in Europe.



Here's where you can read up on the various bankruptcy chapters....

http://www.usfmgroup.com/index.php/B...Explained.html

Chapter 7, 11, and 13 are summarized on that page so none of them are a long read.


max_torq, I believe you are correct. If this gets screwed up the poeple will be against ever doing it again.

Wally, the example you gave has been done many many times in Chapter 11. The workers usually lose out and the top brass retire.




Steve

Wasnt it Renault - from memory no money changed hands, however Renault has given Chrylser access to R&D and technology in exhance for shares/equity. They expect similar takeovers (cashless) as the automotive industry doesnt have a lot of cash at the moment. From memory the "sale" was still awaiting approval and Chrysler were continuing to look at all options. Will see if I can find the article when I get a chance.

[Nikked]

Fords Brazil production plant has a majority of its componet manfacturers on site. Perhaps fords plants in the US might do the same, if GM and or Chrysler crumble

[Ohio XB]

Originally Posted by SB076

Wasnt it Renault - from memory no money changed hands, however Renault has given Chrylser access to R&D and technology in exhance for shares/equity. They expect similar takeovers (cashless) as the automotive industry doesnt have a lot of cash at the moment. From memory the "sale" was still awaiting approval and Chrysler were continuing to look at all options. Will see if I can find the article when I get a chance.

It was Fiat....


http://money.cnn.com/2009/01/19/auto...ler_fiat.reut/


Fiat takes 35% stake in Chrysler

The maker of Ferrari and Maserati takes a stake in the ailing U.S. automaker, but no cash is exchanged.

MILAN (Reuters) -- Italy's Fiat will take a 35% stake in U.S. car maker Chrysler LLC - valued at zero by its part-owner - in a deal aimed at helping the pair survive the worst crisis to hit their industry in decades.



As far as the reference to Ford's Brazil plant, Ford built an Industrial Park at their Chicago facility to house their suppliers there. They are not in the Ford plant but they are on the same street.

Ford also purchased property nearby the plant I work at in Avon Lake, Ohio for the purpose of having suppliers nearby I SUSPECT for the build of the Transit.

I am sure Ford has done this in other places as well and contiues to look to do it at more facilities.


Steve