GM Told To Prepare for Quick Bankruptcy, Paper Reports
By Michelle Krebs April 13, 2009NEW YORK -- Yet another newspaper report claims General Motors is preparing to file for
bankruptcy at the urging of the Obama administration.
This time, it is The New York Times reporting in Sunday's edition that the U.S. Treasury Department is directing the automaker to lay the groundwork for a bankruptcy filing by June 1.
Citing unnamed sources supposedly briefed on the GM's plans, the Times reports the goal is to prepare for a fast "surgical" bankruptcy if the automaker can't reach agreement with bondholders and the United Automobile Workers union for a debt-for-equity swap.
In that regard, CNBC and the Wall Street Journal reported Monday morning that GM is preparing a new offer to bondholders for a debt restructuring that may be far worse than terms the automaker had provided previously. GM last month offered bondholders 8 cents in cash on the dollar, 16 cents on the dollar in new unsecured debt and a 90 percent stake in the automaker.
But CNBC and the Journal report the new offer may include only equity, with no cash and no new debt.
The Good and the Bad
The Times reiterated a plan reported on by numerous media outlets last week that with a bankruptcy filing, a new company would be created to buy GM's good assets, such as its Chevrolet brand and operations in China. Proceeds from the government's eventual sale of equity in the good company in part would go toward paying parties that have leverage over the automaker, including bondholders and union members.
Less desirable assets, such as unwanted brands, factories and health care obligations, would be left in the old company. Those assets could be liquidated over several years. One source told the Times that treasury officials are examining one potential outcome in which the viable GM enters and exits bankruptcy protection in as little as two weeks, using $5 billion to $7 billion in federal financing.
Quick Bankruptcy Trip Unlikely
It's hard to imagine a quick bankruptcy trip for GM being a walk in the park. Such a complicated transaction with so many constituents undoubtedly will trigger legal challenges that could stall the process. In fact, that's one of the major reasons GM has been reluctant to consider bankruptcy.
And in fact, already, the mere threat of bankruptcy has prompted legal maneuverings and action.
The Wall Street Journal reported Monday that key members of an ad hoc committee representing GM bondholders have begun preparing arguments against the automaker's bankruptcy plan. The bondholders, though they'll get something, believe the so-called 363 sale or quick bankruptcy pushes them into hefty losses on their investments a la Lehman Brothers.
Meantime, across the border in Canada, GM has been sued by unsecured bondholders there in a court in Halifax, Nova Scotia. The suit, reported on by the Journal, charges GM wrongfully pulled about $600 million from a Canadian subsidiary last year to address its mounting liquidity problem in the U.S. and they are demanding repayment to the subsidiary.
Those bondholders include the vestment funds of Aurelius Capital Partners LP, Drawbridge DSO Securities LLC and Appaloosa Investment Ltd. The funds say they own more than 60 percent of the approximately $1 billion in notes that were issued in 2003 out of GM's little-known Nova Scotia Finance Co. subsidiary.
The Nova Scotia lawsuit foreshadows many more to come by digruntled GM investors.
At the same time, credit rating agency Standard & Poor's cut several ratings on GM and Chrysler debt, citing the looming government deadlines for restructuring or filing for bankruptcy in a tough auto market.
The ratings agency said creditors for both automakers can expect to take losses in the event of a default, with the losses for Chrysler's lenders being greater. Chrysler, racing to secure a merger with Italy's Fiat, is unlikely to emerge from a bankruptcy intact, S&P said. The service said in a bankruptcy, many of Chrysler's assets and operations would be sold in separate transactions over times with other operations closed.
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