March 31 (Bloomberg) -- General Motors Corp. faces a structured bankruptcy managed by the U.S. government if the company can’t meet a deadline to drastically reduce debt in the next 60 days.

GM Chief Executive Officer Fritz Henderson, on his second day running the largest U.S. automaker, said yesterday that a strategic bankruptcy with government backing is less risky than traditional Chapter 11 protection, though it’s still not GM’s preferred method of survival.

“I think bankruptcy is a very viable option, much better than a receivership,” said Ken Klee of Klee Tuchin Bogdanoff, a bankruptcy firm not involved with the automakers. “It needs to be treated as though it’s in the emergency room.”

Henderson takes over at the largest U.S. automaker after President Barack Obama’s auto task force on March 27 asked Rick Wagoner to resign as CEO. That request followed the group’s decision to reject GM’s plan to return to profit. Henderson, 50, was tapped to push through a new plan with bondholders, unions, dealers and others after a March 29 GM board meeting.

“We need to do more and do it faster,” Henderson said on a call with reporters yesterday.

At stake is $27.5 billion in GM debt that bondholders have been reluctant so far to exchange for equity and $20.4 billion in obligations to a union-run health care fund. It isn’t clear whether the government is using bankruptcy as a threat to hasten the exchange.

‘Meaningful Progress’

“While the company has made meaningful progress in its turnaround plan over the last few years, the progress has been far too slow, allowing the company to continue to lag behind the best-in-class competitors,” according to a task force report.

Obama said yesterday that company creditors, shareholders, workers, dealers and suppliers will be expected to make more sacrifices.

“We believe that there could be a viable business within GM if the company and its stakeholders engage in a substantially more aggressive restructuring plan,” the Obama task force report said.

White House spokesman Robert Gibbs said the administration isn’t pushing for bankruptcy and there’s “no pre-determined deal.”

“If that was the case we would have done that today,” Gibbs said in an interview yesterday. “Where this ends up is going to be determined in the next 30 to 60 days.”

Cost Reductions

Bondholders support Obama’s call for deeper cost reductions at GM because a more aggressive survival plan would boost the value of the equity and new bonds they would receive in an exchange aimed at cutting $27.5 billion in debt, advisers to the bondholder committee said yesterday in a statement.

The committee of GM bondholders didn’t seek Wagoner’s removal and as of yesterday hadn’t had contact with Obama’s task force since they met in Washington on March 5, said a person familiar with the committee, who declined to be identified because the discussions are private.

“We have been very disappointed that the government and company have had virtually no real dialogue with bondholders while designing the proposed restructuring plan,” the advisers said in a statement. “Bondholders have been and remain willing to reduce GM’s future debt burden by exchanging a substantial part of their debt for equity, but that exchange must occur in support of a business plan that has a chance to succeed.”

Best Brands

If GM entered bankruptcy, it would probably work to create a new company containing its best brands, and find a buyer, while sloughing off liabilities, said a person advising GM who declined to be named because the talks about proposals GM will take to the government are private.

The marketing of the new GM could take months, and creditors would be fighting for their share in the company, prolonging the bankruptcy, the person said.

Underscoring the urgent situation, GM may report tomorrow that March U.S sales plunged 48 percent, based on the average estimate of 7 analysts surveyed by Bloomberg.

GM and Chrysler LLC probably dragged the U.S. auto market to a third straight monthly contraction in March, with vehicle sales declining to a seasonally adjusted annual rate of 8.8 million, according to 8 analysts. February’s rate was 9.1 million.

The best path to reshaping the company “may well be an expedited, court-supervised process to extinguish unsustainable liabilities, should an out-of-court restructuring not be possible,” the task force said in a report released yesterday.

Bankruptcy Process

The bankruptcy process for GM could be as short as 30 days, and the government would provide debtor-in-possession financing if needed, according to the summary.

“The administration is prepared to stand by GM throughout this process to ensure that GM emerges with a fresh start and a promising future,” the summary said.

GM will get “adequate working capital” over the next 60 days, while the auto task force works with the company to assess whether it has consolidated enough brands and its debt load, the administration said.

GM has received $13.4 billion of government loans since December. The original loan terms called for the carmaker to get bondholders to give up two-thirds of their debt for new equity by today.

Carmakers “must produce plans that would give the American people confidence in their long-term prospects for success,” Obama said at the White House, announcing new and final deadlines for GM and Chrysler to remake themselves. “We cannot make the survival of our auto industry dependent on an unending flow of taxpayer dollars.”

GM Bonds

GM’s $3 billion of 8.375 percent bonds due in 2033 fell 2 cents to 16 cents on the dollar, according to Trace, the bond- price reporting system of the Financial Industry Regulatory Authority. The debt yields 52 percent.

GM shares yesterday declined 92 cents, or 25 percent, to $2.70 in composite trading on the New York Stock Exchange.

Henderson said he’s not planning to make significant personnel changes that might disrupt efforts to execute the new plan. Kent Kresa, who replaced Wagoner as chairman, will focus on replacing a majority of the GM board, as required by the task force, in time for a vote at the automaker’s August annual meeting, Henderson said.

The Obama rescue plan did not specify cost-cutting targets that GM has to make. The automaker will work with the task force to identify the new goals, Henderson said.

To contact the reporter on this story: Jeff Green in Southfield, Michigan at jgreen16@bloomberg.net

Last Updated: March 31, 2009 04:17 EDT