GM, Chrysler May Face Bankruptcy to Protect U.S. DebtSo, AFTER giving the automakers billions, NOW we want to pressure them and talk bankruptcy? The fox is already in the henhouse and is gorging himself as we speak.
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 rose 5 cents to $2.89 at 11:16 a.m. in New York Stock Exchange composite trading. Chrysler isn’t publicly traded.
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.
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.
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.
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.
This is moral hazard creation in the extreme. Now we have the auto parts suppliers clamoring for their bailout. And, of course, we have to bailout all the individuals who are being thrown to the wolves. Where does it stop?
And once again, because it was all done in haste, the government now finds itself in a subordinate lien position. Bankruptcy laws are made for just this occasion and should have been used. It never should have been started; the auto industry’s talk of bankruptcy being a blow to sales is simply no argument at all.
And I don’t even like the current bankruptcy laws. Our entire system is designed to let businesses make promises and then break them – that’s a moral hazard too. Companies that agreed to provide retirement funds to their employees first under fund these programs and then ditch them during bankruptcy, leaving the employees who thought they had a retirement with little or nothing. The philosophy has been that suppliers must be paid first in bankruptcy to keep it from rippling. Chapter 11 bankruptcy laws (reorganization) promote misallocation and are simply a moral hazard.
In the auto industry, suppliers who extend credit to businesses that can’t maintain their promise to their own employees deserve to fail too. Why would a sane and rational company extend credit to a bankrupt company to begin with? Let those who over promise and overextend fail, then businesses might rethink making promises they can’t keep and other businesses might actually begin using due diligence before extending other businesses credit. That’s the way free enterprise should work.
Perhaps if a company is bankrupt the entire system would be better served by total and swift failure. The airline industry is a great example where zombie chapter 11 companies hurt the financially healthy ones. The healthy were forced to compete against companies who were allowed to slash their debts, employee retirements, and wages during “reorganization” resulting in unfair competitive advantages to those who have already failed. That’s what I mean by moral hazard. “Reorganization” really means broken promises and moral hazard.
Oh yes, it’s a more complicated picture than that. “Free trade” has created a wage arbitrage situation that has completely undermined American’s ability to compete on the international stage. The people who profit from that arbitrage are few, and they are the same ones who contribute to politicians and get bankruptcy laws put in place that favor them.
Of course we are drifting further and further from free enterprise principles. We give the auto makers taxpayer money to support failed businesses, then when the taxpayers are laid off, we use more taxpayer money to provide “assistance” and “stimulus” and yet all that money comes from the same people who are expected to keep buying things to bring these failed companies back to life. It’s now a giant circle of negative consequences that cannot be undone until we abandon critically flawed Friedman /Keynesian thinking and move forward to a system that’s truly sustainable. Any new system must remove moral hazard and that means letting failures fail.