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.