GM bankruptcy would be risky, but looks likely

Over the next few weeks, General Motors is expected to reach another milestone in its storied 101-year history: bankruptcy.

GM announced early Wednesday that it had failed to cajole enough creditors to accept a 10 percent stake in the company in place of their $27 billion in debt.

Now, the global auto giant that traces its history to the horse-and-buggy era is likely to follow its smaller rival Chrysler into bankruptcy court. It would be one of the biggest Chapter 11 cases ever, analysts and industry observers said.

It won’t be easy and it has plenty of risks for GM, for its investors, for taxpayers and for the economy as a whole.

GM said Wednesday its board will meet to decide its next step ahead of the government-imposed June 1 deadline to produce a plan that would prove it could survive without a bankruptcy filing.

Ironically, observers said, Chrysler’s smooth experience in bankruptcy court so far may be helping GM along the same path. It is being seen as a successful model for a potential GM filing, which would be far bigger and more complex.

“A few months ago, the idea of putting a major automaker into bankruptcy raised fears of things spiraling out of control, but the Chrysler bankruptcy seems to be going well, so right now the idea of bankruptcy seems a lot less frightening,” said Jeremy Anwyl, chief executive of automotive research firm

“Of course, GM is a more complicated company, so a bankruptcy here could spin off the rails more easily,” he added. “But I think even with that thought in mind, the idea that Chrysler’s bankruptcy is going so well means they probably think they could easily manage those risks.”

Chrysler appears on track to emerge from bankruptcy court within the 60-day timeframe announced at the time of the filing. The automaker is due in court Wednesday to ask a bankruptcy judge for permission to sell the bulk of its assets to a group headed by Italy’s Fiat in hopes of saving itself from liquidation.

Attorneys for Chrysler say the Fiat deal is the automaker’s best hope to avoid being broken up and sold off. So far, the judge appointed to oversee the case has approved the automaker’s streamlined bankruptcy process, paving the way for Chrysler to form a new company led by Fiat, but the deal still faces opposition from the automaker’s dealers, bondholders, former employees and others.

Prior to the Chrysler filing, the main fear of putting an automaker into bankruptcy was that customers would not want to make a major investment in a product made by a company with a sullied reputation and an uncertain future. But so far there is no evidence that Chrysler sales have suffered since President Barack Obama announced Chrysler’s bankruptcy on April 30, Anwyl said.

Customer intentions to buy a Chrysler dipped slightly in the week following the bankruptcy announcement. The indicator has climbed steadily since then as Chrysler announced aggressive new sales incentives, Anwyl said, citing survey data. Customer intentions to buy a Chrysler are now back at approximately the same levels as January 2009.

Like Chrysler, GM is expected to go into a government-managed “prepackaged” bankruptcy, in which the government provides so-called debtor-in-possession financing to let the automaker continue its daily operations while the bankruptcy court splits operations between a “good” and “bad” GM.

The idea is that the “good” GM, which would include the automaker’s most competitive brands like Chevrolet and Cadillac, would emerge from bankruptcy within a few months with a cleaned-up balance sheet. The company’s poor-performing brands, like Pontiac and Saturn, and other unwanted liabilities would be left behind in the “bad” GM. Those assets then would be sold or liquidated in a more lengthy restructuring process.

GM spokesman Tom Wilkinson said GM’s board will meet later this week to decide its next move, but he would not say exactly when. He also would not say if the company would soon file for Chapter 11, nor would he reveal what percentage of bondholders took the offer.

“The principal amount of notes tendered was substantially less than the amount required by GM to satisfy the debt reduction requirement under its loan agreements with the U.S. Department of the Treasury,” GM said in a statement issued Wednesday.

One reason observers say a GM bankruptcy filing is all but certain is that the automaker this month notified 1,100 of its 6,000 dealers that their franchise contracts would not be renewed next year. The franchisees are protected by a byzantine network of state franchise laws, but those regulations would be effectively superseded by federal bankruptcy proceedings.

Under the latest government-run restructuring plan for GM, the Treasury Department will reportedly take a stake of about 70 percent in the revamped automaker and would get to name members to the new board of directors. GM has also reached a tentative agreement with the United Auto Workers to give the union a 17.5 percent stake in the new company as partial payment toward health benefits for retired workers.

Of course, bankruptcy would not necessarily be easy for GM. Risks remain, noted David Cole, chairman of the Center for Automotive Research in Ann Arbor, Mich. He points out that GM is a much larger and far more complex company that Chrysler, with 244,500 employees compared with 54,000 at Chrysler. GM also has about twice the number of Chrysler dealers, about twice as many brands and, unlike Chrysler, significant operations in Europe, Asia and Latin America.

“If you look at the complexity of the company infrastructure and the number of players involved here — the union, the creditors, the dealers, the suppliers and the government — it’s an unholy cast of characters,” said Cole. “Any one of them could cause a problem, and bankruptcy laws are not well designed to deal with institutions of this complexity.”

Cole also warned that a failure of the “quick-rinse” bankruptcy for GM predicted by the administration could have deeper and more serious implications for the overall U.S. economy. He argues that if the planned bankruptcy process “blows up” it could lead to a “cascading failure,” pushing auto suppliers into bankruptcy and take down other automakers in the process.

“We are talking about the potential for a rapid collapse — it could trigger a national depression,” he said. “The automotive supply structure is in pretty serious trouble now, it’s not profitable and critical suppliers are on the edge of failure, so if we were to see a cascading failure it could quickly spread to the rest of the economy. That’s the scale of this industry.”