June 1 (Bloomberg) -- General Motors Corp., the largest manufacturer to go bankrupt, filed for court protection with a government-financed plan intended to create a viable company that can compete in world markets.

The U.S. government will extend $50 billion of loans to the 100-year-old automaker and plans to convert that into a 60 percent stake in the reorganized company, according to a filing in U.S. Bankruptcy Court in New York. GM today missed a deadline to show that it could reorganize outside of court and reported debt of $172.8 billion, more than twice its assets.

“GM and its stakeholders have produced a viable, achievable plan that will give this iconic American company a chance to rise again,” U.S. President Barack Obama said today. The government was becoming a “reluctant” owner of the automaker, Obama said, adding that his goal was to “take a hands-off approach and get out quickly.”

GM, the largest carmaker until its 77-year reign ended last year, surpassed Chrysler LLC as the largest manufacturer to file for bankruptcy. Detroit-based GM plans to launch a new company in 60 to 90 days, armed with vehicles from its Cadillac, Chevrolet, Buick and GMC units for the U.S. market. The court will supervise the sale or liquidation of unprofitable brands, such as Saturn and Hummer, and at least 11 unwanted factories.

Interim Loan

The automaker won approval of a plan to auction its assets and interim approval of a $15 billion loan from the U.S. and Canada to keep the company going until it can complete the sale, which it plans to do in July.

GM said it has more than 100,000 creditors, and that unsecured creditors will recover some assets in the reorganization. Company operations outside the U.S. weren’t included in the petition.

The case was assigned to U.S. Bankruptcy Judge Robert Gerber in Manhattan, who also presides over the bankruptcies of Lyondell Chemical Co. and BearingPoint Inc. He presided over the bankruptcy of Adelphia Communications Corp. as well.

“Today marks a defining moment in the reinvention of GM,” said company President and Chief Executive Officer Fritz Henderson. “The economic crisis has caused enormous disruption in the auto industry.”

GM listed in its petition as top creditors Wilmington Trust Co., representing bondholders owed $22.8 billion; International Union, the United Automobile, Aerospace and Agricultural Implement Workers of America, owed $20.6 billion; and Deutsche Bank AG, representing bondholders owed $4.44 billion. The Unofficial GM Dealers Committee, which said it represents more than 6,000 GM dealers in the U.S., filed a notice that it will take part in the bankruptcy litigation.

GM Facility

“This is a step they should have taken more than a year ago, which could have put them in much better shape,” said Stephen Pope, chief global strategist at Cantor Fitzgerald in London.

One idle GM facility in the U.S. will be retooled to make small, fuel-efficient cars as part of an agreement with union workers, GM said May 29.

GM’s Saab unit is reorganizing in Sweden. The German government picked Magna International Inc., a Canadian car-parts maker, to buy GM’s Opel unit.

The GM Chapter 11 petition filed today in the U.S. Bankruptcy Court for the Southern District of New York makes the carmaker’s reorganization the third-largest bankruptcy in U.S. history, ranked by total assets listed in the initial filing, after Lehman Brothers Holdings Inc. and WorldCom Inc.

“Any suggestion that an American corporate icon like GM could file for bankruptcy would have been laughable a few years ago,” said Lynn Hiestand, a lawyer specializing in restructuring with Skadden, Arps, Slate, Meagher & Flom LLP.

$39 Billion

Chrysler’s April 30 filing listed $39 billion in assets. The Auburn Hills, Michigan-based carmaker plans to transfer most of its assets to a new entity run by Italy’s Fiat SpA. Another bankruptcy judge in New York approved that deal last night.

Before declaring bankruptcy, GM received $20.57 billion in U.S. Treasury loans, according to the court filing today. Administration officials said yesterday the government would advance $30 billion more, with another $9.5 billion from the Canadian government.

A GM statement today showed consolidated debt in the new company of $17 billion, excluding liabilities such as a workers’ health-care trust, down from $54.4 billion in March. The filing put the new-entity loan total from the U.S. and Canadian government at as much as $65 billion.

Equity Share

Aside from the U.S. government’s equity share, GM’s statement called for a worker health-care fund to get a 17.5 percent stake and the Canadian governments to take 11.7 percent. Bondholders would be eligible for 10 percent and warrants to buy another 15 percent.

There would be no initial public trading of the shares, some of which will be given to the Canadian government in exchange for loans, an administration official said last week. The company might remain private for as long as 18 months, said the official, who asked not to be identified.

GM, being larger than Chrysler, faces more obstacles in mopping up creditor claims that remain in bankruptcy after the streamlined company is created. Reeling from almost $88 billion in losses since 2004, GM may not return to profitability if U.S. vehicle sales are below 10 million a year, an amount the government said a new GM will need to break even.

The company has $22 billion in bond debt and $20.6 billion in UAW obligations, according to court papers.

GM Creditors

Of GM’s creditors, Starcom MediaVest Group, the automaker’s largest trade creditor, is owed $121.5 million, according to the bankruptcy filing. GM said it owed former parts-unit Delphi Corp. $110.9 million. Other key parts suppliers owed money include Robert Bosch GmbH, owed $66.2 million; Lear Corp., owed $44.8 million; and Johnson Controls Inc., owed $32.8 million.

Magna International Inc., a Canadian car-parts maker leading a group that may buy GM’s Opel unit, is owed $26.7 million, according to court papers.

GM today filed a request to sell most of its assets to a Treasury-sponsored entity that will hold the government’s stake in the company. GM’s board of directors said in court papers that an asset sale to the Treasury is “expedient.”

Of the government funding, “approximately” $30.1 billion in new money will be advanced by the Treasury, according to the filing.

GM said in court papers that it has no objections to a bankruptcy by its Canadian unit.

GM’s Saturn LLC and Saturn Distribution Corp. also sought court protection today. The Chapter 11 petitions are the “only opportunity for preserving” the Saturn brand, according to the filings. Saturn’s board approved the sale of its assets to the U.S. Treasury, according to court papers.

Credit-Default Swaps

Today’s filing will trigger credit-default swaps protecting about $3.1 billion of GM debt, in the biggest settlement of the derivatives since September’s collapse of Lehman Brothers. Pricing reflected the risks last week as dealers charged about $8.7 million upfront and $500,000 annually to protect $10 million of debt.

GM had global liabilities of $176.4 billion as of Dec. 31, 2008. Banks such as JPMorgan Chase & Co. secured GM’s revolving loan of about $4.5 billion with inventory, receivables and factories, also providing a $1.5 billion term loan. The face value of its bonds was $27 billion.

The automaker agreed to buy back ownership of Delphi plants in Wyoming, Michigan; Lockport and Rochester, New York; and Kokomo, Indiana, according to a Delphi statement.

GM’s North American sales were $86.2 billion in 2008, compared with $34.4 billion in Europe, $20.3 billion in Latin America, Africa and the Middle East, and $17.8 billion in the Asia Pacific region, according to a regulatory filing.

GM sales dropped 33 percent in April.

William Durant

The automaker was founded in 1908 by William “Billy” Durant, who bought more than 20 car companies before being ousted in a 1920 bailout by Pierre Du Pont and J.P. Morgan.

By the 1960s, GM controlled more than half the U.S. vehicle market. In 2008, it sold only 8.35 million cars worldwide, losing its place as the world’s No.1 automaker to Toyota Motor Corp. as customers opted for the Japanese carmaker’s fuel- efficient Corolla and Camry brands instead of GM’s light trucks and Hummers.

GM’s shares traded at less than a dollar last week after Bloomberg News reported it would file for bankruptcy by today.

Lehman filed the biggest bankruptcy in September, listing assets of $639 billion. WorldCom collapsed in 2002 with assets of $103.9 billion. GM reported $82.3 billion in assets.

Government Loans

U.S. Treasury loans to GM topped $20.6 billion, the company said in a filing today. Its second- and third-largest secured creditors were listed as banks led by Citigroup Inc. and JPMorgan Chase & Co., with $3.87 billion and $1.49 billion in claims, respectively, followed by Export Development Canada, with $400 million, and GELCO Corp., with $125 million.

GM’s bankruptcy petition was filed by Harvey Miller and Stephen Karotkin of the New York law firm Weil Gotshal & Manges LLP, which is also advising Lehman.

The automaker’s primary bankruptcy counsel is Weil Gotshal. GM is also represented by Jenner & Block LLP and Honigman Miller Schwartz and Cohn LLP as counsels. Cravath, Swaine, & Moore LLP is providing legal advice to the GM board of directors. GM’s restructuring adviser is AP Services LLP and its financial advisers are Morgan Stanley, Evercare Partners and the Blackstone Group LP.

GM Bonds

GM’s $3 billion of 8.375 percent bonds maturing in 2033 climbed 4 cents to 14.5 cents on the dollar at 12:12 p.m. in New York, according to Trace, the bond-price reporting system of the Financial Industry Regulatory Authority. The debt has risen from a record low of 4.5 cents on May 14.

GM was unchanged at 75 cents in New York Stock Exchange composite trading.

The New GM will launch several vehicles in 2009 and 2010, the company said, including the Chevrolet Camaro, the Buick LaCrosse, a midsize sedan, the Cadillac SRX and CTS Sport Wagon, the Chevy Equinox, GMC Terrain and the Chevy Cruze, GM’s “new global compact car.”

Also scheduled for production is the Chevy Volt, “an extended-range electric vehicle that can travel up to 40 miles on battery power alone with the extended-range capability of more than 300 total miles,” the company said.

Following its bankruptcy petition, GM filed “first day” motions seeking Judge Gerber’s permission to spend funds so as to continue business operations while under court protection.

Honoring Obligations

These include honoring obligations to employees and retirees, continuing customer programs including warranties, fulfilling financing agreements and making payments to “essential suppliers and logistics providers,” GM said.

The Chapter 11 proceeding will slash GM’s consolidated debt from $54.4 billion in March to only $17 billion for the new entity, GM said in a statement. The number excludes liabilities such as its obligations to the employee health-care trust.

“The gravity of the circumstances cannot be overstated,” GM said in court papers. “The business and assets to be transferred are extremely sensitive and will be subject to major value erosion unless they are quickly sold and transferred to New GM.”

The bankruptcy transaction, the automaker said, “furthers public policy by avoiding the fatal damage to the industry that would occur if New GM is unable to immediately commence bankruptcy-free operations.”

The case is In re General Motors Corp., 09-50026, U.S. Bankruptcy Court, Southern District, New York (Manhattan).

To contact the reporters on this story: Linda Sandler in New York at lsandler@bloomberg.net; Christopher Scinta in U.S. Bankruptcy Court in New York at cscinta@bloomberg.net; Bob Van Voris in New York at rvanvoris@bloomberg.net; Jeff Green in Southfield, Michigan, at jgreen16@bloomberg.net

Last Updated: June 1, 2009 19:44 EDT