WithLLC forced to file for bankruptcy after failing to renegotiate its debt with all its lenders, the pressure on creditors to come to terms with Corp. has been effectively dialed up by the Obama Admin.
“Absolutely, it turns up the heat,” says Lincoln Merrihew, senior vice president, automotive, TNS North America, a market research and consultancy firm in Newton, MA.
convinced its major creditors to take $2 billion in cash in exchange for wiping away some $6.9 billion worth of debt, but a handful of smaller financial institutions resisted. The group also rejected a last-ditch offer last night from the U.S. Treasury Dept. sweetening the deal to $2.25 billion.
Chrysler filed for bankruptcy today, a proceeding it expects to conclude within 60 days, prior to a tie-up withAuto Group securing its future. Obama, addressing the Chrysler situation in a speech from the Oval Office earlier today, supported Chrysler’s filing and said the government would provide the auto maker with financing during the proceedings.
However, GM also is mired in a showdown with its creditors. The auto maker wants bondholders to exchange roughly $27 billion worth of debt for equity in the company. GM is offering 225 shares of stock for every $1,000 worth of debt held, which would equal about 10% of the reformulated company.
GM President and CEO Fritz Henderson signaled Monday after launching the bond exchange offer that the terms were non-negotiable. He said Obama’s auto industry task force capped the amount bondholders could own at 10%, but debt holders last night delivered a counteroffer reportedly calling for them to control 58% of a new GM.
Under that scenario, the United Auto Workers union health-care trust would receive 41%, instead of 39%, of GM, while the taxpayers, having lent GM $15.4 billion, would get nothing instead of a 51% stake under the auto maker’s current proposal.
It is unclear whether any form of sweetener – cash or otherwise – is in the cards for bondholders, but Obama’s comments seem to suggest that is unlikely. Neither GM, nor the auto task force, immediately returned calls asking for comment.
“I don’t stand with them,” Obama said of Chrysler’s holdout creditors. “I stand with Chrysler’s employees, and their families, and their communities.
“I stand with Chrysler’s management, its dealers and its suppliers,” he added, referring to the holdouts as “speculators” during his speech. “I stand with the millions of Americans who own and buy Chrysler cars. I don’t stand with those who held out while everyone else is making sacrifices.”
Obama said Chrysler’s impending bankruptcy procedure would be “quick, efficient” and target the holdout creditors.
Merrihew says Obama’s words send a clear message to GM’s lenders, as well. “It says, ‘Hey, we’re all on the same team, and if you don’t play ball, you don’t get any cushion in the end.”
That does not necessarily mean creditors will receive unfair treatment from a bankruptcy judge, he adds. But with the UAW already agreeing to major concessions at Chrysler and GM, it places the bankruptcy spotlight entirely on lenders.
“Everyone else is on board, and the remaining rogues will have all the attention on them,” he says. “The bankruptcy is just for the rogue group. Everyone will be treated as fairly as possible, but if there is any leeway, the leeway will move away from the rogues.”
John Berlau, director-Center for Investors and Entrepreneurs at the Competitive Enterprise Institute, a free-market think tank in Washington, expects the nation’s judicial system to operate independent of its executive branch in any bankruptcy.
“This country is not about intimidation,” he says. “We need to shine a light on the assets and liabilities of Chrysler (and) not browbeat the court into going Obama’s way.”
Chrysler’s bankruptcy filing confirms an anticipated strategy for separating the good and bad parts of the auto maker, leaving the healthiest pieces to thepartnership and saddling underperforming elements with debt. The yet-to-be-identified “bad parts” would be sold to pay off creditors.
Chrysler calls its approach – known under bankruptcy law as a 363(b) filling – speedy, and one allowing “a leaner new company to emerge…well positioned for long-term viability.”
In this sense, Chrysler could be paving the way for a similar bankruptcy strategy at GM if its debt-exchange fails, says Nicole Y. Lamb-Hale, a managing partner at Foley & Lardner LLP in Detroit, a specialist in automotive supplier bankruptcies.
“It’s likely GM will follow this pattern,” Lamb-Hale says. “If certain things move quickly in Chrysler’s bankruptcy, that would be the playbook for a GM bankruptcy.”
Analysts and industry insiders for weeks have talked about splitting the auto maker into two companies, a “good GM” containing the Chevrolet, Cadillac and possibly GMC and Buick brands and a “bad GM” encompassing the rest. The auto maker already has said it plans to kill Pontiac by the end of 2010 and either sell or phase out Saturn, Hummer and Saab by the end of this year.
However, splitting a company into good and bad pieces has not always proven an entirely successful strategy.Corp. tried it outside of bankruptcy, forming Automotive Components Holdings LLC in 2005 to wind down unprofitable portions of its business so it could keep supplying parts to Motor Co.
So far, ACH has either sold or indefinitely idled 19 of 23 formerplants and facilities, but the supplier still teeters on the verge of bankruptcy. Late last month, auditors expressed substantial doubt over Visteon’s ability to stay in business after the supplier said in a regulatory filing it could file for bankruptcy.
But Lamb-Hale says “good part/bad part” bankruptcies play out in court every day, just not under such public scrutiny.
“Often a company goes through bankruptcy to shed non-core assets,” she says. “You shed assets that are a financial drain and eroding your profitability. That happens in every case.
“In this situation, because of the notoriety, there’s an assumption of what is bad or good. So this ‘good Chrysler, bad Chrysler’ is the same analysis.”
GM says in a statement it remains focused on accelerating its restructuring and reducing the debt and liabilities on its balance sheet.