Pushed towards bankruptcy

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Pushed towards bankruptcy

A MONTH ago General Motors announced the terms of a restructuring plan designed to help it to avoid bankruptcy. At the time an unnamed member of Barack Obama’s administration was quoted as saying that “you don’t need banks and bondholders to make cars”. He said aloud what the offer to the bondholders had merely implied. For unsecured loans worth $27 billion, creditors would be awarded a paltry 10% of the “new” GM. And unless 90% of creditors agreed by a deadline of midnight on Tuesday May 26th then GM would undoubtedly have to reinvent itself in the embrace of Chapter 11 bankruptcy protection.

Most observers reckoned that the deal for creditors was rough to the point of insult and that Mr Obama’s car-industry task-force was intent on the bankruptcy court to restructure a firm that had once commanded half of America’s car market. In contrast the deal offered GM’s union, the United Auto Workers, which was hardly blameless in GM’s demise, 39% of the company in lieu of a promise to pay $10 billion into a healthcare fund.

Bondholders were unimpressed. Reports suggest that only a small proportion of creditors tendered their bonds despite signs that other parties were prepared to give ground. On Tuesday the union apparently conceded that it would moderate its claim and accept just a 20% stake in GM. The extra shares might have been offered as a sweetener for the bondholders. Instead the government, which could be on the hook for another $50 billion to finance GM’s restructuring in Chapter 11, looked set to grab this additional shareholding itself. Added to what it had already earmarked in return for propping up the car firm since the end of last year, the government could end up with a 70% stake.

GM’s board was set to convene on Wednesday to consider its next move. It has little recourse but to seek bankruptcy some time before June 1st—the original deadline for hammering out a deal. Mr Obama’s officials clearly hope to see a quick, prepackaged bankruptcy which would stick closely to the terms that GM has already offered.

The attitude of the bankruptcy courts to deals overseen by the car task-force was tested on Wednesday. Chrysler, which filed for Chapter 11 on April 30th, is undergoing the same sort of fast-track bankruptcy procedure over the heads of aggrieved creditors. The government, banking on the judge agreeing that Italy’s Fiat can take a 20% stake in Chrysler in return for small-car technology that may help the firm survive, looked set to get its way. This could indicate that the bankruptcy court will also look favourably on the pre-arranged terms of the GM deal rather than siding with angry bondholders.

The alternative, to sell off the car company piece by piece, may be less palatable for all concerned. It is far from certain that buyers could be found in the economic slump. GM's unsecured creditors, whose loans are not backed by assets such as factories or stock, have a slim chance of getting much money back. Another factor complicating the decision for GM’s bondholders is that many covered their positions with credit-default swaps that would pay out in the event of a “credit event” such as bankruptcy.

GM’s fate in America is becoming clearer, but the outlook for Opel, the firm's cash-strapped European operator, is still uncertain. Despite rumours that it might do so on Wednesday, the German government has not decided whether Magna International, a maker of car parts based in Canada, or Fiat will be the preferred bidder for Opel. Magna is said to have edged ahead with a promise of fewer job cuts, although industrial logic is still on Fiat's side. But Germany, which will pump billion of euros into Opel, wants the issue resolved before GM's bankruptcy filing in order to avoid the European firm becoming entangled in already complicated proceedings.

The hunt for winners in the remaking of North America’s car industry is a short one. Chrysler will probably emerge soon from bankruptcy shorn of encumbering debts and slimmed down to a shape more in keeping with the reality of car markets now. GM, though a far more complicated case, may do so too. Both will be shadows of their former selves under the uncertain sway of government and unions. By one estimation Ford, which had restructured just enough to avoid having to turn to the government for cash bail-outs, will become North America’s biggest carmaker this year. Ford may pick up sales from its rivals in bankruptcy. That is just as well. It retains obligations to banks and bondholders that are, in fact, still necessary to make cars in the traditional way.

[ocnblu]

Does anyone know when the last time Ford was bigger than GM? It has been many, many decades. I'm speechless.

[Z-06]

Does anyone know when the last time Ford was bigger than GM? It has been many, many decades. I'm speechless.

That was 77 years ago when GM took the title of #1 auto manufacturer.

[Drew Dowdell]

I much rather it be Ford than Toyota.