GM, Chrysler May Be Put Into Bankruptcy to Protect U.S. Loans

Heads up on this because this Bloomberg headline alone is going to rattle already stressed nerves tomorrow.

With the automotive supplier market already in freefall, open discussion of this by government officials is not going to bode well for the confidence factor here.

http://www.bloomberg.com/apps/news?pid=20601087&sid=ad_m06A_gtLk&refer=home

GM, Chrysler May Be Put Into Bankruptcy to Protect U.S. Loans
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By Mike Ramsey and Tiffany Kary

Feb. 9 (Bloomberg) -- General Motors Corp. and Chrysler LLC may have to be forced into bankruptcy by the U.S. government to assure repayment of $17.4 billion in federal bailout loans, a course of action the automakers claim would destroy them.

U.S. taxpayers currently take a backseat to prior creditors, including Citigroup Inc., JPMorgan Chase & Co. and Goldman Sachs Group Inc., according to loan agreements posted on the U.S. Treasury’s Web site. The government has hired a law firm to help establish its place at the front of the line for repayment, two people involved in the work said last week.

If federal officials fail to get a consensual agreement to change their place in line for repayment, they have the option to force the companies into bankruptcy as a condition of more bailout aid. The government would finance the bankruptcy with a so-called “debtor in possession” or DIP loan, a lender status that gives the U.S. priority over other creditors, said Don Workman, a partner at Baker & Hostetler LLP.

“They are negotiating to see if they can reach an agreement,” said Workman, a bankruptcy lawyer based in Washington. “If not, they are saying ‘We are pretty darn sure that a bankruptcy judge will allow us’” to be first in line for repayment.

Both automakers have dismissed calls to reorganize under bankruptcy protection, saying a Chapter 11 restructuring would scare away buyers and lead to liquidation. GM and Chrysler are working toward a Feb. 17 deadline to show progress on a plan put in place as part of the U.S. loans received in December from the Troubled Asset Relief Program. They must reduce labor costs and show how they will repay the money by next month.

Out of Court

GM and Chrysler are already trying to restructure out of court, cutting labor costs, reducing debt levels and eliminating dealers. GM is in talks to pare $27.5 billion in unsecured debt to about $9.2 billion in a swap for equity.

The company said it plans to shut dealers and reduce obligations to a union retiree health fund by half to $10.2 billion in a separate equity swap. Chrysler Chief Executive Officer Robert Nardelli has said his company will also try to cut debt levels.

January sales from automakers plunged 55 percent at Chrysler, 49 percent at GM and 40 percent at Ford Motor Co.

Ford, the second-largest U.S. carmaker, has declined government bailout funds so far.

The government has the option of working out an intercreditor agreement outside of bankruptcy that would give it rights to some collateral ahead of other creditors. Such agreements, often made when money is lent to a company that already has liens on most of its assets, are usually negotiated when the loan is made.

U.S. Law Firm

Cadwalader, Wickersham & Taft LLP is advising the government on how to make sure it gets paid back first, including by way of intercreditor agreements, the people involved with the talks said. Hired last month, the law firm is working for the government with Sonnenschein, Nath & Rosenthal, a Chicago-based firm with capital-markets experience, and Rothschild Inc., an investment bank, the people said.

The issues are “extremely complex,” said Bruce Clark, a credit analyst at Moody’s Investors Service.

The existing loan agreements appear to give the banks a superior position to the government, Clark said.

“However, at the end of the day, the ultimate position of the government could end up being determined by whatever concessions various creditors make, and the determination of a bankruptcy court if it ever gets there,” he said.

When the automakers were lobbying the government for assistance, lawmakers made a point of saying that the government must be assured that if the companies failed, taxpayers wouldn’t lose the investment.

Existing Lenders

Workman said the U.S. couldn’t force its loans to supersede existing secured lenders, so it built in a measure that allowed the debt to be converted to debtor-in-possession financing.

“A carrot and stick approach is spot on,” he said.

As it stands, the government loans fall below existing debt secured by most assets for Auburn Hills, Michigan-based Chrysler and Detroit-based GM. Prior lenders have first position on some assets. The government has first position on assets not already pledged.

Chrysler has $7 billion in loans from a group of banks, including New York-based JPMorgan, Goldman Sachs and Citigroup. It also has $2 billion in loans from owners Cerberus Capital Management LP and Daimler AG. Cerberus owns 80.1 percent of Chrysler. Daimler owns the remainder.

GM has $6 billion in loans secured by assets from lenders including JPMorgan and Citigroup. JPMorgan spokesman Brian Marchiony, Goldman Sachs spokesman Michael Duvally and Citigroup spokeswoman Danielle Romero-Absilos declined to comment.

Lori McTavish, a spokeswoman for Chrysler, declined to comment beyond confirming the primacy of the bank loans. GM spokeswoman Renee Rashid-Merem and Treasury spokesman Isaac Baker declined to comment.

Unless the automakers show by March 31 that they will be able to return to profit and repay the money, the government can demand return of the loans.

To contact the reporters on this story: Mike Ramsey in Southfield, Michigan, at mramsey6@bloomberg.net and; Tiffany Kary in U.S. Bankruptcy Court in New York at tkary@bloomberg.net.
Last Updated: February 9, 2009 00:01 EST

 

Well how is C, JPM and GS ahead of us when we bailed them all out. Nice going Bush. At least Obama airing Bush's dirty laundry.

 

Things are starting to get a little tricky. The government better figure out how to fix the system before the next big crisis is a currency crisis.

 

There is absolutely no way that things are predictable right now. All one can do is react. Long term is 1 week at this point. Seems as if things are taking on a life of their own - unintended consequences of legalese.

Good luck to all of us - we are surely in need of it.

 

Absolutley! As the government tries to protect the wealth of the wealthy, all the rest of us can do is go in to survival mode.
There is zero confidence in the streets and nothing that's being suggested will help the average American.

 

Nissan to slash 20,000 jobs and sees annual loss.
The entire auto industry is collapsing.
No jobs=no money to buy a car
No confidence in our government=not willing to buy a car even if you have the money.
No cars being bought=collapse of steel industry.
Collapse of steel industry=collapse of tens of thousand of job shops.
Collapse of tens of thousands of job shops=collapse of retail.
Collapse of retail=you get the picture

 

Interesting situation. Youwould think the government could at least coerce banks it was propping up to let it cut in line ahead of them with the auto companies. Doing so however might expose the bank managment to shareholder suits for waste of corporate assets. The auto companies are doomed in any case. Even well-run companies are losing money by the boatload, and they aren;t saddled with the Big three's onerous union obligations. Any more money for the Big three is just a payoff to the UAW and a delay of the inevitable.

 

So this must mean that the funds have not flowed to the automakers yet (otherwise they'd be in line behind other creditors anyway, and forcing the automakers into bkprcy would be extremely stupid).

Or are they trying to protect just a second flow of funds???

Also I am surprised that they are even feigning to give a shit about what happens to the taxpayer... confusing, since if they did why would they be spending trillions of taxpayer dollars they don't have yet on other nonsense??? Talk about mixed signals...