Time Is Running Out for GM and Chrysler

The two struggling automakers have got to cut deals and prove their viability, or face bankruptcy. They need to speed things up

Say what you want about the United Auto Workers. But at least at the UAW there's one guy—the union's president, Ron Gettelfinger—whom you can bargain with to cut a deal.

Not so among the creditors of Chrysler and General Motors (GM), both of which are in a tight race against the clock to get their respective lenders to slash long-term debt. Both companies not only face resistance, but their lender groups have multiple players with varying interests and opinions.

To get guaranteed government funding to avoid bankruptcy, GM and Chrysler must both get their union and lenders to make big concessions. GM wants to get its bondholders to trade most of the value of their bonds for stock. Chrysler and the U.S. Treasury Dept. have offered the automaker's lenders $1 billion in new debt for the $7 billion it owes them.

GM has a tough challenge with the thousands of bondholders who hold its $28 billion debt. Treasury wants GM to get roughly 90% of them to take a massive cramdown—which could be anything from an all-equity deal to less than 10¢ on the dollar and the rest in stock—to make the company viable. If that doesn't happen, Treasury might force GM into bankruptcy.

Trading for Pennies

But bankruptcy is becoming more likely as GM is worried that it may not be able to get anywhere near 90% of the debt restructured. As a practical matter, it's tough to reach all of the thousands of bondholders and get them to accept a debt-to-equity conversion offer by Treasury's June 1 deadline. The group changes as the bonds trade hands, and many are held by individual investors, points out a source close to the situation.

One bondholder is Geoff Glatt, who works as an auditor in Harrisburg, Pa. Glatt bought the bonds last June at 68¢ on the dollar after Pimco founder Bill Gross recommended them in Barron's that month. Now the bonds are trading at 9¢, and Glatt hopes to get more than pennies on the dollar. Moreover, he's not crazy about the stock.

"Ford (F) offered 38¢ on the dollar for its unsecured debt. That seems fair. I'd even be happy with 25¢ at this point," says Glatt. "If I wanted stock, I would have bought it." He says he's waiting to see what GM and the Treasury will offer.

So even if the ad hoc committee representing bondholders gets its members to accept, GM and the Treasury will still have many more people to convince. The ad hoc committee (whose counsel is law firm Paul, Weiss, Rifkind, Wharton & Garrison) represents only about $12 billion of the $28 billion in debt.

Traditional Bankruptcy Still Possible

That's why bankruptcy is a possible outcome. GM has even been preparing for a filing, and proceedings could be simple if enough bondholders agree to a deal up front. If GM gets two-thirds of the bondholders to accept an offer of, say, 10¢ on the dollar plus some stock before filing, the bankruptcy judge could legally force that deal on the remaining bondholders.

In that case, says one source close to GM, the company wouldn't even have to split GM into a "good GM" and a "bad GM." That has been the prevailing wisdom so far, that GM would put Chevrolet, Cadillac, and perhaps Buick and GMC into a "good GM" and load the weak brands, bond debt, and closed factories into the "bad GM" for liquidation.

But if enough bondholders agree to a deal in advance, the company would simply go into court in a traditional bankruptcy to dispose of bond debt.

If enough bondholders agreed to that kind of cut, a deal with the union could be more easily had. The union's pension plan would remain untouched. But before GM filed, the UAW would agree to accept new stock for at least 50% of the $20 billion GM owes the union, funds to start a health-care trust to pay retiree medical benefits. And UAW workers would take a wage cut, say sources close to the deal. So GM would emerge from bankruptcy with very little bond debt, no more union health-care liabilities, and a network of factories sized for its real market share.

Giving Up Famous Brands

While all of that is being negotiated right now, the Treasury task force has questioned whether GM should keep the five brands named as core to the company in its proposal to the feds. At various points, Treasury has asked whether Pontiac, Buick, and GMC should survive. GM is already working on deals to sell or dispose of Saturn, Hummer, and Saab.

GM has made the case that Buick is vital to the business in China and that GMC brings in a lot of revenue and profit. "They're pushing us and probing. We're closing in on a new view of the world," says a GM executive. If any more brands go away, Pontiac would be more likely, but GM management wants to keep it. The executive said that "the notion that GMC is going away is flat-out wrong."

Chrysler's challenge is similar to GM's. While its creditor group isn't as diverse as GM's bondholder population, Chrysler has about 50 firms holding its secured debt—and a government deadline of Apr. 30.

Early in April the Treasury offered $1 billion in new secured debt for the $7 billion Chrysler owes the lenders, but the lenders said no. Since then, there has been some dissension among the creditors.

TARP vs. Non-TARP Creditors

Initially four of the five top creditors on the steering committee—Citigroup (C), JPMorgan Chase (JPM), Goldman Sachs (GS), and Morgan Stanley (MS)—were banks that received money from Treasury's Troubled Asset Relief Program (TARP). Last week the steering committee took three additional creditors into its fold, all of which had not received TARP funds.

Some of the creditors worried that creditors that had received TARP money might bend to the will of the Treasury's task force and accept an easier deal. So the non-TARP creditors hired legal counsel.

The TARP and non-TARP creditors are allied in wanting to preserve as much as they can, says Tom Lauria, who leads the restructuring practice at New York law firm White & Case, which represents some of the lenders. But "we are concerned that Treasury may try to abrogate the creditors' contractual rights."

Lauria says taking stock in Chrysler is a possibility. But the creditors are assessing their options and must reach a consensus before making an offer. "Everyone wants to avoid a messy bankruptcy," he says. "Some people may have to take equity."

His clients and Chrysler have only two weeks to get it done; otherwise, the automaker could end up in bankruptcy. GM has longer—but for everyone involved, time is wasting.

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