US Desire for Priority Repayment May Lead to GM, Chrysler Bankruptcy Filing

We’ve been of the view that despite its theoretical advantages, (enabling various liabilities and cliaiims to be restructured more easily) a bankruptcy filing for a big automaker would be likely to lead to liquidation. A pre-pack is impossible for companies of this scale; an article in the Deal laid out the process and contended that GM would not emerge until late 2010. Based on consumer surverys (and our own queries to a few GM carowners we know) consumers would be leery of buying from an car manufacturer in bankruptcy. A further fall in cashflow could push them to liquidation, which would be devastating to parts suppliers and as a result, also damage the foreign transplants.

The US is demanding priority over some secured lenders, which if it cannot secure waivers from them, may lead to a bankruptcy filing for GM and Chrysler. From 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…

GM and Chrysler 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.

Note the issue is not the bondholder intransigence issue that Felix Salmon worried about in December, but that the Federal government wants priority over some secured lenders:

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.

Let’s hope the banks blink. Since the main lenders are TARP recipients, one would think this is all rearranging deck chairs on the Titanic, but the policy of giving big banks bailouts with insufficient and ill defined controls may come back to haunt the Treasury sooner than it expects.

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  1. Anonymous

    With all those warranty expiring auto-dialer calls people are getting, I wonder if that scam will suddenly see lots of suckers once the news reports a GM and Chrysler bankruptcy.

  2. bb

    this article is an exercise in futility: the banks that take precedence before the government are debtors to the government itself.

  3. David

    I am not a bankruptcy lawyer but I don’t think this article is quite right. If the US becomes the DIP lender, it just means that any additional loans will have a super-priority lien. The previous loans do not jump ahead automatically. However, if those loans were short term and then need to have the principal paid back soon, then they could refinance them through the DIP in which case they would be replaced with super-priority liens. So it all depends on maturity. Were the govt loans short term?

  4. charlie

    yes, the govt loans were short term and the other killer factor in c11 is the dealers. Not sure how dealers would be treated as creditors under c11 as it varies from state to state. Also, all dealers are already creditors, and they also have 30-40 days of inventory on stock.

    You could close everything and sell assets to a newcorp to get around that problem — a quick and dirty c7 — but I don’t see how that will help consumer confidence. You could also dump a lot of vehicles below cost in a c11, but that will have a lot of negative blowblack to the surviving companies. A GM car c11 car may not be worth 25, but it could be worth 15. Really really hurt Ford, Toyota and Honda. GM has 180 days of inventory in stock? A c11 sale could destroy all auto sales for 2009.

  5. Anonymous

    “Let’s hope the banks blink. Since the main lenders are TARP recipients, one would think this is all rearranging deck chairs on the Titanic, but the policy of giving big banks bailouts with insufficient and ill defined controls may come back to haunt the Treasury sooner than it expects.”

    Banks? Banks sold most of their loans. You’re looking for Pimco and other funds holding bank loans to blink. And given that Pimco successfully played chicken with its bonds, the funds holding secured loans probably will also.

    And no, the DIP lender doesn’t leap frog secured lenders. That only happens to the extent the value of the collateral exceeds the amount of the loan, and maybe even interest.

  6. Anonymous

    I say we do a Lehman on Chrysler, and if there are any unintended consequences we can rush a multi-billion dollar bail-out bill through Congress so we will have the tax-payer funds to do a Citigroup on GM and a Bank of America on Ford.

    But, of course, this time it would be better planned because we have so much more knowledge of creating an economic crisis.

  7. Anonymous

    To the one who said “I say we do a Lehman on Chrysler ect…” Thanks that is one of the LOL moments I have had reading all the stupid decisions the gov is making. Have a great day. Thanks again..

  8. Anonymous

    Why should consumers be leery of doing business with a bankrupted auto manufacturer?

    They do business with insolvent banks right now.

    The government guarantees everything, so why not guarantee GM cars as well?

  9. Anonymous

    we should be so lucky to see the autos forced into bankruptcy and tax payers get $.10 on the dollar back.

  10. Anonymous

    Lets all pay our taxes on April 15th with our credit cards or loans and then default on them. If 150 million Americans did this simultaneously we could force the banks to give back what they’ve stolen from taxpayers.

  11. Anonymous

    Too bad if you make above the median income you can no longer get rid of your CC through bankruptcy. If that many did it too, they’d probably bring back debtor’s prisons.

    Seems like Bush and the Credit companies saw this coming, hmmmm

  12. whitetower

    [Yawn.] There’s nothing sacred about auto manufacturers. If they go out of business, so be it — it’s not conceptually different than if any given mom & pop store goes under.

    The auto manufacturers, their lenders, and their investors will have to take their lumps just like any other business in the same predicament.

  13. Filmo

    While I agree that there would be great dislocation and a whole lot of pain involved in GM/Chrysler going out of business, I’m of the opinion now that unless we allow all the bankrupt/insolvent entities die. (c7 seems a reasonable option), leaving them as zombies with government funds actually does more harm to the eventual survivors (TM, Honda, Ford, etc) than the short term benefit of maintaining jobs and manufacturers that aren’t needed.

    I’d rather take all the lumps right now and then recover quicker, than be ‘sick’ for 5 or 10 years while constantly throwing good money after bad.

  14. jstratt

    This article is just wrong. The government wanted to give money to the automakers so they gave it away. They could have gotten senior status but they didnt want to force the issue. Now what you have is window dressing to make it sound tough because it is clear the money is gone.

    Dont kid yourself the auto industry is important. Saving it will take bankruptcy and bankruptcy will be a good thing trimming back wages and debt to levels that breathe life into US auto makers.

    I am an optimist and I think we will get bankruptcy before it is over. Until that time we will get articles devoid of logic such as this one.

    Consider GM to be a debt ridden child of the government. It comes to Daddy looking for money to pay the interest on debt. Daddy may give some money for a while and pooof it is gone. Sooner or later however Daddy is going to say no or deal with the problem asking others to share the pain before infusing more money.

    Dont be afraid of bankruptcy as it is the only thing that will save GM. The auto PR departments will provide junk like is in this article to avoid anything like Union cost reductions or executive stock getting cancelled.

  15. Anonymous

    Chapter 7 for GM and Chrysler is really the way to go.

    Bailing them out only forestall the inevitable, while most of their supplier base get nothing even though they will be forced into Chapter 7 or 11.

    Hopefully, buyers will emerge for the viable pieces of their assets.

  16. Anonymous

    Pardon the OTness, but this is just so wonderful to see. Our great national enema will get nowhere until we listen to the guys who have experience fixing terminally-corrupt third-world kleptocracies

  17. Anonymous

    There's nothing sacred about auto manufacturers. If they go out of business, so be it — it's not conceptually different than if any given mom & pop store goes under.

    Well… if US automakers go out of business then a lot of independent auto shops will go out of business for lack of customers — Japanese cars have an annoying tendency not to break down nearly as much.

    Not to mention Exxon having to get used to much smaller profits — japanese cars have another annoying tendency of not guzzling nearly as much gas.

    Vinny SILVERberg… just kidding… Vinny GOLDberg

  18. Anonymous

    The Chinese solution to the debt problem:

    Fire consumes Beijing television headquarters

    By Jamil Anderlini in Beijing

    Published: February 9 2009 17:19 | Last updated: February 9 2009 17:19

    Fire consumed part of the Chinese state broadcaster’s landmark headquarters complex in Beijing on Monday evening as many in the capital celebrated the end of the lunar new year holiday by setting off fireworks.

    Just like the garment district.


  19. Anonymous

    FT’s Wolf: Obama/Geithner/Summers are Cowards! that is why they won’t nationalize the banks!'s-Wolf-U.S.-Too-%22Politically-Frightened%22-to-Admit-Truth-About-Banks-Part-I?tickers=XLF,C,RBS,LYG,BCS,FAZ,SKF's-Wolf-Says;_ylt=Akocv0eYXCCcLFgI.Ou6MgG7YWsA?tickers=XLF,SKF,FAZ,C,BAC,JPM,WFC

  20. Anonymous

    "FT's Wolf: Obama/Geithner/Summers are Cowards! that is why they won't nationalize the banks!"

    Geithner and Summers aren't cowards. They are brazenly helping the street drink from the public trough. Geithner's former bosses, the directors of the NY Fed, are all GS alumni or clients, so Geithner is doing his best to help his patrons at GS and the rest of the street. Likewise, Summers is looking to help his former bosses at DE Shaw. Just like Rahm is looking to help his buddies at Wasserstein Partners LP.

    Yes, we can — shifting from upper East side & Houston cronyism to upper West side & Hide Park cronyism.

  21. eh

    So if the ostensible reason for the government anteing up for the automakers is to preserve jobs, why would they insist on something that is likely to result in bankruptcy? Which you’d think would cost a lot of jobs, including at suppliers. Hard to see the democratic Obama administration — which has a majority in both houses of Congress — going that route. The way Obama is pushing the stimulus, it seems he has no qualms about indebting future generations. So what’s a few billion more to support the automakers?

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