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Especially when it comes to bankruptcy. The automakers have so brainwashed Congress about a filing that it really shouldn't come as a revelation if they convince our most esteemed politicians that it's more palatable to pump another $21 billion into the companies just to keep them afloat for another two years than it is for GM and Chrysler to seek Chapter 11 protection. In December, The Deal magazine undertook a case study of sorts examining what a GM bankruptcy would look like and how it would unfold. The piece concluded that only Chapter 11 affords the tools and process needed to drastically reinvent the 101-year-old global concern.
GM in particular still touts publicly that a bankruptcy filing would forever tarnish its brand (and taking $30 billion in taxpayer money doesn't?) and cause revenue to plummet (already happening). What GM doesn't mention -- save for a one-sentence acknowledgment on page 103 of its restructuring plan -- is that Chapter 11 would provide the company with a venue to unilaterally impair creditor claims, reject its labor contracts, sell assets free and clear of liens and terminate real estate leases. Even more unfounded is the automakers' argument that a Chapter 11 filing would be more costly for the government. Chrysler, for example, in its restructuring plan asks Congress for about $5 billion in financing (on top of the $4 billion it has already received). The Cerberus Capital Management LP-owned company said a Chapter 11 filing would require at least $24 billion in DIP financing from the U.S. Treasury. Put aside for a moment the ridiculous notion that Cerberus cannot pump more capital into its own portfolio company because of existing agreements with its investors. Cerberus controls one of the most active participants in the DIP-lending market, Ableco Finance LLC, which committed $252.4 million in DIP financings in 2008, ranking it 15th among all DIP lenders for the year, according to BankruptcyInsider.com. Ableco can't at least participate in a Chrysler DIP, paring the U.S. Treasury's final cost? After all, Ableco gave bankrupt auto supplier Dura Automotive Systems Inc. a $170 million DIP just last year. GM, meanwhile, said it would need at least $30 billion in DIP financing under a prepackaged bankruptcy (a filing made with all creditors having already voted in favor of the restructuring plan) and more than $100 billion in a traditional Chapter 11 case. Because of the size of the loan and the state of the credit markets, the only possible DIP lender to GM is the U.S. Treasury. Such figures are staggering when compared to GM's request for an additional $16.6 billion to avoid bankruptcy. But there's no guarantee that GM's projections to break even in two years (when the loans would be due) are accurate, and therefore no guarantee that taxpayers would be paid in full on their investment, or that GM could even stay out of bankruptcy down the road. DIP financing, on the other hand, would be secured by GM's most valuable collateral and, by bankruptcy law, be paid in full in cash upon confirmation of a Chapter 11 reorganization plan. GM's banks, bondholders and unsecured creditors would likely see their potential recoveries diminished by a massive DIP loan, but the American taxpayer wouldn't. In its presentation to Congress, GM notes how " 'quick' has seldom been the pace of bankruptcy proceedings in this country," and provides statistics that only 3% of companies with more than $1 billion in assets have exited Chapter 11 protection in 90 days or less. The research is misleading because it doesn't account for only companies that have filed a prepack, or prenegotiated bankruptcy like GM surely would. The Deal speculated that a GM bankruptcy would likely be in the form of a prenegotiated Chapter 11 filing. The automaker probably lacks the time to reach an all-encompassing restructuring agreement with all of its creditors (as well as the United Auto Workers union) before a filing, but its restructuring plan makes clear the groundwork for a prenegotiated filing has already been laid. In the plan, GM laid out the terms of a debt-for-equity swap with a committee of bondholders to convert some $29 billion in debt into equity. Also, the automaker has reportedly reached an agreement with the United Auto Workers union on a range of labor cost reductions. So, while a company as large and complex as GM would likely be in bankruptcy for longer than three months, its projections of an 18- to 24-month stay are quite likely to be overly pessimistic. The largest issue in GM's restructuring -- whether in court or out of court -- is likely to be terms of a revised VEBA trust to cover the costs of healthcare for retired union workers. GM, which has already deferred payments to the trust, wants to pay a portion of its cash obligation to the funds with stock instead. Not surprisingly, the UAW has scoffed at the idea. Bankruptcy would not guarantee an agreement with its labor unions, but Section 1113 of the federal Bankruptcy Code gives debtors extraordinary powers to reject or modify their collective bargaining agreements. All a debtor has to do is prove to a judge that it made a good-faith attempt to renegotiate the labor contract to no avail, and a bankruptcy judge will typically reject the CBA. But the most appealing aspect of an automaker bankruptcy filing is the transparency inherent in the process. Only bankruptcy can impose the discipline necessary to remake GM or Chrysler, some argue. A federal judge experienced in corporate restructurings and with a set of federal laws to abide by -- not a "car czar" (remember that one?) -- would govern the process, a process with full disclosure for all creditors involved (including the American taxpayer). "It's the rule of law instead of the rule of politics," said John Jerome of law firm Saul Ewing LLP in The Deal's GM piece about what a bankruptcy for it would hold. And while the latter is what Congress so unabashedly trafficks in, the current economic crisis and the fate of American automakers really requires politicians -- our lawmakers, we are taught in school -- to put GM and perhaps Chrysler under the thumb of the former. - John Blakeley See GM bankruptcy feature story from The Deal magazine Categories Deal Video
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Congress believed Hank
Paulson. Heck, they even believed Rafael Palmeiro and Roger Clemens on
steroids before what's become an ad nauseam Alex Rodriguez mea culpa.
So will anyone be surprised if they take what General Motors Corp. and
Chrysler LLC tells them hook, line and sinker?
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