Wachtell, Lipton, Rosen & Katz partners Scott K. Charles and Richard G. Mason in a memo wrote that "one could rationally conclude that any sort of Big 3 bankruptcy, prearranged or not, should be avoided if at all possible due to the significant risk of failure, and that every effort should be made instead to resolve the situation through out-of-court procedures." That said, the attorneys did see some benefits that could be achieved if the government was to assist in some sort of a prearranged Chapter 11 case.
While many have offered opinions on how to restructure GM, Wachtell's thoughts carry more weight because the firm could be retained by the automaker should it go under. Wachtell recently represented former GM subsidiary GMAC LLC in its application to become a bank holding company, which would make it eligible for federal bailout cash from the Troubled Asset Relief Plan.
The attorneys explained a prepackage could provide interim stability, rationalize the automaker's balance sheet, offer chances to renegotiate or terminate dealer agreements and supplier contracts, close plants and modify labor agreements. The balance sheet improvements would come from renegotiated debt obligations, some of which could be converted into equity to delever the company. Dealers, meanwhile, would lose the protection state franchise laws leaving the automakers free to rationalize their sales channels.
The attorneys also argued that a prepackage could protect consumers. Though many worry consumers, who often count buying a car as their second-biggest financial decision after buying a house, will avoid bankrupt automakers, Charles and Mason said Federal dollars might be used to back the warranty obligations and keep sales going. The Treasury could also become involved by spurring consumer demand for auto purchases, either through auto finance arms or via banks through the TARP program.
The bottom line, according to the attorneys, is that even a fed-sponsored filing "would be complicated, expensive and difficult to achieve." The companies, on their own, could find it impossible to implement change quickly enough in bankruptcy to prevent catastrophic losses of cash. But with Washington's assistance, the attorneys argue, the automakers would stand a better chance.
"With the financing markets still frozen for credit in the amount necessary to preserve the going-concern value of an industrial complex the size of the U.S. auto industry, tailored governmental intervention may in fact present the only viable alternative for effectively restructuring the Big 3," they wrote. - Lou Whiteman
See Dealwatch: Autos
If General Motors Corp. or another auto company needs to turn to the courts, attorneys with one leading restructuring law firm suggest the company's best bet could be a government-sponsored prearranged Chapter 11 bankruptcy filing.
