Obama Favors Bankruptcy for GM, Chrysler
http://online.wsj.com/article/SB123841609048669495.html
WASHINGTON— The Obama's administration's leading plan to fix General
Motors Corp. and Chrysler LLC would use bankruptcy filings to purge the
ailing companies of their biggest problems, including bondholder debt
and retiree health-care costs, according to people familiar with the matter.
The move would in essence split both companies into their "good" and
"bad" components. The government would like to see the "good" GM to be a
standalone company, according to an administration official. The "good"
Chrysler would be sold to Fiat SpA, assuming that deal is completed,
this person said.
GM and Chrysler have had bankruptcy attorneys devising plans for such a
move in recent months.
President Barack Obama's task force has told both companies that the
administration prefers this route as a way to reorganize the two auto
makers, rather than the prolonged out-of-court process that has thus far
frustrated administration officials.
GM looks increasingly like it will be forced into filing for bankruptcy
protection, sometime in mid-to-late May, in a plan where the automaker
breaks into two companies, the surviving entity a "new GM" that
maintains key brands such as Chevy and Cadillac and some international
units, say several people familiar with the situation.
Stakes in this new GM could be given to creditors and UAW members. It is
also possible the new company could be sold whole or in parts to investors.
The auto makers could avoid bankruptcy in the next two months. And there
is some brinksmanship still going on in GM's high-level talks with
bondholders, union members and creditors.
A key ingredient is getting the UAW to agree to an entirely new labor
contract, including major reductions in health-care benefits, according
to several people involved in the matter. "That's the No.1 wildcard
here," one of these people said Monday.
Under this plan, the "good" GM would not be expected to hold the tens of
billions of dollars in retiree and health care obligations that hurt the
auto maker in recent decades. Instead, those obligations would be
transferred to an "old GM," made up of less-desirable brands like Hummer
and Saturn, and underperforming plants and other assets. This part of GM
would likely sit in bankruptcy much longer while a buyer is sought for
the parts or it is wound down. Proceeds from the sale of old GM would go
to pay claims to various creditors, including GM retirees.
"That is the plan, to the extent it comports with the bankruptcy laws,"
said one person familiar with the matter.
Some of the New GM-Old GM is laid out in the GM viability plan the
company sent to the federal government last month. In it, GM estimates
that it would shrink from 22% of the U.S. market to about 19%.
At Chrysler, bankruptcy would be used to force new labor contracts and
rework debt deals with secured creditors. People working on Chrysler's
behalf say the deal is risky, because the company is still not convinced
that it could survive even a short-term bankruptcy. It could be done in
order to meet the Obama administration's demand that Chrysler's
creditors agree to huge reductions in their expected recoveries on
Chrysler debt.
Also Monday, new GM Chief Executive Frederick "Fritz" Henderson told
employees and dealers that the company will end up in bankruptcy court
if it does not significantly accelerate its restructuring efforts in the
next 60 days, according to a dealer who watched a broadcast of a meeting
with Mr. Henderson.
Mr. Henderson said "we'll be in bankruptcy" if the company cannot meet
the U.S. government's demands for faster progress on its turnaround
plan, this dealer said.
Mr. Henderson told employees that the Obama administration was
disappointed with the company's viability plan, feeling it didn't move
fast enough or cut deeply enough into the company's debt. GM was told
it didn't leave enough money in the company's pockets to get it through
a full business cycle, either, according to the dealer.
GM was also told in no uncertain terms that it must learn to make money
on smaller cars–not just trucks and sport-utility vehicles, the dealer said.
Warning that they can't depend on unending taxpayer dollars, President
Obama on Monday gave GM and Chrysler a brief window to craft plans that
would justify fresh government loans.
"We cannot, we must not, and we will not let our auto industry simply
vanish," President Obama said at the White House.
"What we are asking is difficult," he said. "It will require hard
choices by companies. It will require unions and workers who have
already made painful concessions to make even more. It will require
creditors to recognize that they cannot hold out for the prospect of
endless government bailouts."
The remarks came a day after the administration ousted GM Chief
Executive Rick Wagoner and rejected the restructuring plans that GM and
Chrysler had hoped would lead to another infusion of government cash.
Instead, the White House is giving GM 60 days to come up with a strategy
for viability. Chrysler has a month to wrap up a partnership with
Italy's Fiat SpA.
The Journal's John Stoll says that with billions in taxpayer money on
the line, the Obama administration needs to work closely with GM to
forge a more dramatic restructuring.
GM on Monday said it will address "the tough issues to improve the
long-term viability of the company," including the restructuring of its
financial obligations, as it responded to Washington's calls for
stronger plans to stay afloat.
The administration says a "surgical" structured bankruptcy may be the
only way forward for GM and Chrysler, and President Obama held out that
prospect Monday.
"I know that when people even hear the word 'bankruptcy,' it can be a
bit unsettling, so let me explain what I mean," he said. "What I am
talking about is using our existing legal structure as a tool that, with
the backing of the U.S. government, can make it easier for General
Motors and Chrysler to quickly clear away old debts that are weighing
them down so they can get back on their feet and onto a path to success;
a tool that we can use, even as workers are staying on the job building
cars that are being sold."
GM said it prefers to complete its restructuring out of court, saying it
would complete a more accelerated and aggressive restructuring to put
the company on sound long-term financial footing.
"We have significant challenges ahead of us, and a very tight timeline,"
said new GM CEO, Mr. Henderson. "I am confident that the GM team will
succeed and that a stronger, healthier GM will play an important role in
revitalizing America's economy and re-establishing its technology
leadership and energy independence."
The auto makers, hobbled by the economic downturn and years of reliance
on sport-utility vehicles, will receive an unspecified amount of working
capital from the government while they hone their new plans.
Detroit in Crisis
Without a Fiat deal, the administration said Chrysler won't receive any
more taxpayer dollars. The administration expressed confidence GM can
survive with more drastic action.
GM and Chrysler received a total of $17.4 billion in government loans in
December and have requested roughly another $22 billion to keep them
going through this year. President Obama's auto task force combed
through the firms' restructuring plans to judge if they merit the
additional funds. The verdict released Sunday is that in their current
form, the plans don't justify any new taxpayer resources.
If Fiat and Chrysler reach a definitive alliance agreement, the
government would consider investing as much as $6 billion more in Chrysler.
Despite the grim view of Chrysler, the administration's task force said
it had no intention of replacing CEO Robert Nardelli. Unlike Mr.
Wagoner, who had been at the helm of GM since 2000, Mr. Nardelli is
considered an auto-industry outsider who has only been in charge at
Chrysler since the company was acquired by Cerberus Capital Management
LP in 2007.
In addition to pushing out Mr. Wagoner, the task force said GM is in the
process of replacing the majority of its directors. Kent Kresa, a
longtime director, will serve as interim chairman. Mr. Wagoner will be
replaced as CEO by Mr. Henderson, who was been serving as chief
operating officer.
Administration officials on Sunday made it clear that an expedited and
heavily supervised bankruptcy reorganization was still very much a
possibility for both companies. One official, speaking of GM, compared
such a proceeding with a "quick rinse" that could rid the company of
much of its debt and contractual obligations.
The clearest losers appear to be the thousands of bondholders and
lenders to both GM and Chrysler. In both cases, administration officials
said that the companies were burdened by inordinate amounts of debt that
would have to be scrubbed. Chrysler's survival, the administration said,
would require "extinguishing the vast majority" of the company's secured
debt and all of its unsecured debt and equity.
To assure consumers reluctant to buy GM or Chrysler cars, the government
plans to take the unusual step of guaranteeing all warrantees on new
cars from either company. These guarantees would lapse back to the
companies once they return to health.
Mr. Wagoner had managed GM through some of its most difficult moments.
The company hasn't logged a profit since 2004, reporting losses since
then of $82 billion. It nearly ran out of money at the end of 2008
before the Treasury Department provided emergency loans. GM's stock was
trading above $70 when Mr. Wagoner took over as CEO in June of 2000. The
shares closed last week at $3.62, placing the company's market
capitalization at $2.21 billion. In Monday trading on the New York Stock
Exchange, GM shares were down 76 cents, or 21%, to $2.86.
Mr. Wagoner's tenure came amid challenges that weren't entirely of his
own making--including costly retiree benefits and union contracts that
predate him, and the recent deep recession. Yet GM by most measures
performed worse than other auto companies. Among the key decisions that
hurt the company: a huge bet on trucks and SUVs that piled up on
dealers' lots unsold as high gasoline prices drove Americans to look for
more fuel economy offered by rival companies.
Mr. Wagoner was asked to step down on Friday by Steven Rattner, the
investment banker picked last month by the administration to lead the
Treasury Department's auto-industry task force. Mr. Rattner broke the
news to Mr. Wagoner in person at his office at the Treasury, according
to an administration official. Afterward, Mr. Rattner met one-on-one
with Mr. Henderson, who will fill in as GM's CEO.
"On Friday I was in Washington for a meeting with administration
officials," Mr. Wagoner said in a statement released by GM. "In the
course of that meeting, they requested that I 'step aside' as CEO of GM,
and so I have."
GM spokesman Steve Harris declined to comment.
In a statement released by GM Sunday night, Mr. Kresa said: "The Board
has recognized for some time that the Company's restructuring will
likely cause a significant change in the stockholders of the Company and
create the need for new directors with additional skills and experience."
Mr. Wagoner's removal shows that the sacrifices could cut deep. The
departure of the company's top executive promises to further shake up a
company that has already been through considerable change over the past
six months. The 56-year-old executive had been scrambling to craft a
strategy aimed at maintaining leadership in the global sales chase with
Toyota Motor Corp. and making big profits in emerging markets.
But Mr. Wagoner's plans came crashing down in the second half of 2008 as
the company ran short of cash and was forced to ask the government for
billions of dollars in aid. At the same time, his executive team started
dismantling several parts of the company, including a plan to shed
several brands, slow the pace of new-product introductions and sell
stakes in international operations.
Industry's Outlook
The president's auto task force has spent more than a month digging into
the restructuring plans that GM and Chrysler submitted last month. The
team has struggled to make two determinations: when will the steep
plunge in car sales end and what will the market look like once it revives.
GM has based its revival plans on the U.S. market rebounding to sales of
14.3 million vehicles a year in 2011, up from a rate of about nine
million vehicles so far this year. Many analysts now consider GM's
short-term forecasts to be overly optimistic.
Of the $21.6 billion in additional funding that the auto makers have
requested, GM is seeking $16.6 billion more, while Chrysler has asked
for $5 billion more.
Among challenges the administration faced leading up to this weekend's
decision, foremost were the efforts to draw steep concessions from the
United Auto Workers union and from the bondholders.
Attempts to solidify deals with the UAW and bondholders were slowed by
disagreements by both parties over how exactly the other party needed to
budge. The UAW, for instance, insists it already made health-care
concessions in 2005 and 2007, and argues that the bondholders have never
been asked to concede anything.
"I don't see how the UAW will do anything until they see what the
bondholders will give up," one person involved in the negotiations on
behalf of the UAW said Sunday.
Bondholder Factor
The bondholders have said that they are willing to make concessions, but
they have wanted to see the union make further cuts. The fact GM raised
most of the unsecured debt to fund union health-care and pension costs
is also seen as a reason why the union needs to take bigger steps.
With Mr. Obama potentially holding off on new loans until concessions
are made, analysts said GM likely has enough cash on hand to weather at
least another month before its need for more government aid becomes
urgent. Chrysler may need another infusion of cash sooner. Ford Motor
Co. hasn't sought federal assistance.
Both GM and Chrysler are negotiating with the UAW to accept a range of
cost-cutting measures, including greatly reduced work forces, lower
wages and a revamped health-care fund for retirees.
The U.S. auto industry has been reeling from a plunge in car sales over
the last six months. Sales in February were down about 40% over the same
month last year. The drop has sent shock waves through the hundreds of
smaller parts companies that supply the big auto makers. To keep the
sector afloat, the administration recently announced a $5 billion
financing facility to help suppliers cover their expenses.
The original December loans were given under the agreement that all
sides would strike a compromise deal by March 31, but the administration
is taking advantage of a clause allowing all sides another month to
negotiate. "It was unrealistic to renegotiate a new labor agreement and
the unsecured debt in so short a time," said Sean McAlinden, chief
economist with the Center for Automotive Research, in Ann Arbor, Mich.
"That has never happened before."
GM and Chrysler are meant to submit by Tuesday assessments of where
their restructuring efforts are heading. In February, both companies put
forward plans for paring their operations, reducing their work forces
and eliminating vehicle models.
GM and representatives for its bondholders remained in talks over the
weekend about a deal that would force these investors to turn in at
least two-thirds of the value of the debt they hold in exchange for
equity and new debt.
This arrangement would force GM to issue significantly more stock than
what is currently being traded in the market. In addition, the
government is being asked to guarantee the new debt with federal default
insurance in order to entice bondholders who otherwise wouldn't be
interested in participating in the swap.
If GM can't eventually forge a deal with the ad hoc committee
representing the bondholders, the company may be forced to issue a
debt-for-equity swap without the blessing of some of its biggest and
most influential unsecured investors. This would heighten the
possibility of the company eventually needing to file for Chapter 11
bankruptcy protection.
The group representing GM bondholders was reviewing the White House
documents and plans to make a formal response later Monday, according to
a person familiar with the situation.
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