Obama Admin Pushing Bankruptcy As Lead Option For Carmakers
The Obama administration's leading plan to fix General Motors Corp. (GM) 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, which would comprise brands such as Chevy and Cadillac, to be an ongoing company, according to an administration official.
The 'good' Chrysler would be sold to Fiat SpA (FIATY), assuming that deal is completed, this person said.
GM and Chrysler have had bankruptcy attorneys devising plans for such a move in recent months. 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 as if it will be forced into filing for bankruptcy protection, sometime in mid-to-late May, in a plan under which the auto maker breaks into two companies, the surviving entity a 'new GM' that maintains key brands such as Chevrolet and Cadillac and some international units intact, 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.
Bankruptcy isn't the only option. 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 other creditors.
A key ingredient in acting on this plan 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 wouldn't 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 such as Hummer, 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 back to pay claims to various creditors, including the 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 strategy is laid out in the GM viability plan 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 still isn't 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. |
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