Is Obama’s leaked view that a “quick and surgical bankruptcy” was a “likely option” for GM and Chrysler form of bizarre brinksmanship? If not, Obama has just painted himself in a corner based on what looks to be some very bad advice.
As we will explain below, the notion of a “quick and surgical” bankruptcy for GM, and probably Chrysler too, is a fantasy. GM would be the most complicated bankruptcy ever. It simply isn’t amenable to a prepack or a fast track variant. In fact, somme bankruptcy experts think a Chapter 11 restructuring simply isn’t possible and a filing would morph in the courthouse into a liquidiation. That in turn would take out many suppliers, and many of the foreign transplants too.
And before you insist that Obama has access to the best legal and economic advice, I suggest you review the record on the banking industry front and think twice. The policy moves so far have been dictated by faux constraints, such as “no more Lehmans” and “we can’t go back to Congress for more money” and “we don’t do nationalizations”. The same sort of contorted thinking that produced the public private partnership monstrosity seems to be at work here.
Update 2:00 AM. The New York Times sets forth how the Administration intends to ram a deal through, namely, by, splitting the company in two and getting “some” creditors to agree to the split. The problem with this construct, however (and BK experts welcome to opine), it appears from the long-form description of how a big complicated BK normally proceeds, that having “some” creditors agree doesn’t cut it. As we recount further down, bankruptcy experts had earlier ruled out a pre-pack as being undoable due to the impossibility of getting the needed number of parties to consent in a compressed timetable, I don’t see how having a structural proposal solves that fundamental problem.
From the Times first, then back to the earlier post:
The government may seek to ease General Motors into what it calls a “controlled” bankruptcy, somewhere between a prepackaged bankruptcy and court chaos, by persuading at least some creditors to agree to a plan that would cleave the company into two pieces, according to people briefed on the matter.
Instead of signing on every creditor as is typically required in prepackaged deals, administration officials are using as leverage the promise of taxpayer financing….
“As lawyers would say, it’s sui generis, at least in my experience,” said Joel B. Zweibel, the retired co-head of restructuring at the law firm O’Melveny & Myers…..
Under a plan being worked out by the administration, G.M. would file for prearranged bankruptcy, according to these people. It would then use a sale authorized under Section 363 of the bankruptcy code to quickly sell off the desirable assets to a new company financed by the government. These good pieces might include Cadillac and Chevrolet, as well as assets the company needs to run the business.
Less desirable assets, brands like Hummer and underperforming factories, would be left in the old company. Proceeds from the sales, including stock in the new company, would be given to the old G.M., helping to settle claims….
The administration hopes to win support from some of G.M.’s creditors, notably the United Automobile Workers, which would be forced to pare its health care benefits and whose pension obligations would probably remain in the old company. But the bankruptcy code allows a judge to approve a sale even over creditor objections in an emergency under Section 363, legal experts say. Such was the case with the Lehman sale….
History offers almost no precedent for a G.M. bankruptcy filing. Companies like Continental Airlines and the Delphi Corporation, the auto parts maker, have used the courts to transform their businesses and reduce their costs. But none matched the size and interconnectedness of G.M.
Yves again. This is very high stakes poker. If this gambit fails, the Administration will have staked its credibility on not bailing out GM and will likely feel compelled to withhold support, which will force a BK, controlled or conventional. And if you read between the lines, while none of the experts were willing to dash cold water on the idea, they signaled strong reservations:
“You’re introducing politics into the process,” said David A. Skeel, a law professor at the University of Pennsylvania.
The administration may still encounter surprises in its efforts, Mr. Skeel said.
“The hope is that if we call it a controlled bankruptcy, that’s what it will be,” he said.
The Administration had no problem lending what amounted to $250 billion to Citigroup, plus the equity infusions (if memory serves me right, $45 billion). Sure pays to be a bank.
Back to the original post.
Let us review some key sections of an article at The Deal in December on what a GM BK would look like,:
After the short-term bailout fails, GM files for bankruptcy, ousts Wagoner and receives a $25 billion debtor-in-possession financing provided by the federal government either directly or out of the Treasury’s Troubled Assets Relief Program, or TARP. The company make its Chapter 11 filing in the U.S. Bankruptcy Court for the Eastern District of Michigan in Detroit. It’s neither prepackaged nor, for that matter, significantly prenegotiated. Congress has been throwing the prenegotiated concept around, but in reality, because of GM’s size, only a partial prenegotiated filing is practical.
Why no prepack? GM simply lacks the time to prepare a prepack, where a company works with lenders, creditors and shareholders to craft a reorganization plan and then solicits votes, all before entering bankruptcy. A prepack would require a “bajillion” creditors to buy in, says veteran auto industry attorney Jean Robertson of Calfee, Halter & Griswold LLP, an inordinately lengthy process when GM is burning through roughly $1 billion in cash a month.
According to James Wilton of Ropes & Gray LLP, who was debtor counsel to auto parts maker Holley Performance Products Inc., a complex case such as GM’s would require negotiation after filing instead of before…
Yves here. OK, got that? No pre-pack. Too many moving parts. Back to the story:
So GM prenegotiates a deal with creditors only. The company has already said in Securities and Exchange Commission filings that it has begun negotiations with lenders, bondholders and its unions to whittle its debt at year’s end by $32 billion to roughly $30 billion. It hopes to complete the process by March 31, the deadline under the tentative bailout bill for agreement on a long-term viability plan…..
Yves again, We are two months behind that timetable. Back to the article:
Downtown Detroit — at least the hotels and restaurants — rapidly fills up with all the visiting lawyers and advisers. GM isn’t going to pull an Enron Corp. and make its petition hundreds of miles away in New York (too expensive) or Delaware (the appellate court isn’t kind to the idea of abrogating collective bargaining agreements)….
The sheer size of a GM proceeding mandates that other high-profile cases not overwhelm a court. Many of GM’s suppliers are nearby, as is the United Auto Workers’ headquarters…..
Another factor: Delaware isn’t a particularly friendly place to break union contracts. “The standard for doing that in the 3rd Circuit [Delaware, New Jersey and Pennsylvania] is hard to accomplish,” says David Stratton of Pepper Hamilton LLP, debtor co-counsel for Holley.
The feds charge LIBOR plus 300 basis points on the DIP, 300 basis points below the current rate, but still capable of providing a return for taxpayers without killing GM. And by providing the DIP, taxpayers get paid before other GM creditors. Providing DIPs, says Saul Ewing’s Jerome, is “a more rational use of bailout money, less political.”….
But what about GM’s financial creditors? GM’s debt load, SEC filings show, includes a secured revolving credit facility with the full $4.4 billion drawn on it, a $1.5 billion secured term loan, three series of unsecured convertible debentures with more than $6.9 billion outstanding, about $16 billion in unsecured bonds and $19 billion in other long-term liabilities, ranging from municipal bonds and capital leases to contingent convertible debt and foreign currency-denominated bonds. Then, of course, there are GM’s bailout funds. It’s unlikely that all those debtholders will reach agreement, even after substantial talks.
Thus the seeds of dissension among creditors will have already been sown, and the chances of even a prenegotiated deal exploding are high, Calfee Halter’s Robertson says. “I would hope that the creditors would work together, because they have everything to lose,” she says.
Barnes & Thornburg’s Thorne is more hopeful. “Even if all the ‘I’s weren’t dotted and the ‘T’s weren’t crossed [before the filing], constituencies would come together,” she says. “There will be fights over money, but creditors will be working together because if they can’t and production stops, the costs are monumental.”
Nearly every constituency, of course, wants its own official committee in order to have its professional expenses paid out of the GM estate. As in almost every bankruptcy, an official committee of unsecured creditors is appointed. But U.S. Trustee Daniel M. McDermott, who oversees bankruptcies in Michigan and Ohio, wants to keep committees to a minimum. (The judge in the case has some say here, too.) McDermott must decide whether GM retirees and bondholders get official committees. Ditto for car dealers. Those without official status assemble informal panels. GM shareholders try to get an equity committee, and they’re laughed out of court….
While this jockeying is going on, Cooper [the presumed new CEO] turns his attention to his biggest task: reshaping GM’s operations. He will have to downsize the company, cutting brands, dealers, workers. The only thing to increase will be mobs of unhappy people. Cooper decides to retain Cadillac as GM’s luxury brand, Chevrolet as its core and GMC as its truck line. Everything else has to be unloaded through Section 363 sales.
GM will become more like Nissan, Toyota Motor Corp. and Honda Motor Co. Ltd. Gone are Buick, Pontiac, Hummer, Saab and Saturn. For GM, it serves as more than a catharsis. There is now much less duplication, less overhead and more cash from sales to pump back into the business. Some discarded brands don’t sell quickly (Hummer), while others will (Buick operations in China, where the nameplate is very popular). Overall, GM must sell millions of fewer cars a year to become profitable again. “The fundamental change [for GM] is that it’s going to have to not be all things to all people and create all these niche cars for niche markets,” says the restructuring adviser, adding that GM has to realize that being a carmaker is simply not about grabbing the biggest market share. “It’s better to say, ‘Lets find products to build profitably.’ “
But before GM can begin 363 sales, it must deal with labor and dealers, says Conway MacKenzie & Dunleavy managing director Gregory A. Charleston. “Once you deal with that baggage,” the turnaround consultant says, “you can potentially sell the pieces.”
Yves here. So you think this can be quick and surgical? Look at all the stuff that has to happen. Returning to the piece:
At the very least, GM needs to modify labor pacts to lower costs for existing, longtime workers, which may be difficult if not impossible, given recent contract modifications. And then there’s the question of brand elimination and its effects. While such actions might not be technically included in labor deals, any actions concerning workers would force more talks……A new deal doesn’t necessarily drastically alter GM’s pension or healthcare costs. According to GM spokeswoman Julie Gibson, the U.S. pension plans for salaried and hourly employees are “overfunded on a combined basis.”
UAW retiree healthcare costs of roughly $46.7 billion, meanwhile, are set to shift to a voluntary employee beneficiary association, or Veba, in January 2010, in exchange for set payments by GM negotiated last year. A similar deal with another union, the IUE-CWA, takes effect two years later.
Still, even here lurk potential pitfalls. Thomas Salerno of Squire, Sanders & Dempsey LLP says “overfunded is an estimate” and that the debtor has to work to avoid contingent liabilities — another sign that Section 1113 or related Section 1114, which governs rejection of retiree benefits, needs to be invoked. Plant closures can spark early retirements, which can turn overfunded plans into underfunded ones in a hurry.
GM won’t reject its pension plans, however. To do so, says attorney Carol Connor Cohen of Arent Fox LLP, the debtor would have to show that it and related entities couldn’t stay in business with the need to make payments on the plans. “I’d be very surprised if they could meet that test,” she says.
But healthcare is a different matter. The automaker has already deferred $1.7 billion in payments to the UAW Veba and could seek further deferrals; SEC filings indicate GM must either contribute $5.6 billion in 2010 — a tall order — or make annual payments of anywhere from $421 million to $3.3 billion through 2020. An additional $1 billion contribution is due in 2011, and $285 million of other payments is due on the implementation date.
Robert P. Simons of Reed Smith LLP says GM “shouldn’t kick the can down the road like what happened with the steel industry during the 1980s.”….
With fewer personal ties to union management, new GM management is in a better position to invoke Section 1113 and Section 1114 and negotiate rolled-back benefits.
The same equation holds for GM’s bloated dealer network….
Less cut and dried are GM contracts with parts makers. The ripple effect of GM’s woes extends over hundreds of suppliers. That’s why payments to them won’t be interrupted. But there are certain suppliers GM realizes it no longer needs as the bankruptcy progresses….
The remaining suppliers will have to restructure with the support of GM — and their lenders — to supply parts for future GM vehicles, Robertson says. She acknowledges this won’t be painless. “There will be a lot of casualties along the way. A lot of people going out of business….”
Yves here, I’ve spared you a lengthy discussion of GMAC and how that impacts dealers. Again to the story:
Eventually, sometime in late 2010, GM resolves its issues with GMAC, dealerships, parts suppliers and unions. Asset sales are now well under way or concluded under the auspices of the bankruptcy court. A new capital structure has been welded to a new, streamlined operational chassis. And there are some nifty, new fuel-efficient cars, too….
And after a creditor vote and a closely watched confirmation hearing, a trim GM rolls out of court one blustery winter day in Detroit and heads into the automotive future.
I’m always a bit leery of relying on single source, but The Deal is for lawyers and M&A/private equity/bankruptcy professionals. Its reporters cover that beat intensively and (as you can see) do detailed reporting. The timetable their sources gave for a GM bankruptcy is close to two years.
What is Team Obama smoking? It isn’t to their advantage to have an unrealistic view of the process, yet the pronouncements strongly suggest they haven’t done sufficient due diligence on what this entails.
And consider this comment from a reader:
The “Chapter 11” reorganization idea is an assumption. There is little contemporary evidence that a Chapter 11 reorganization of GM can succeed under the current system. A Chapter 7 bankruptcy liquidation is more likely. And there is no evidence Chrysler will do anything other than liquidate.
It would be better if we were wrong, but this looks like Lehman redux. The powers that be are getting bailout pushback, and aren’t willing to take any financial perps out, so by default it’s Big Auto. And if they miscalculated, the consequences will be catastrophic. It won’t simply be GM and Chrysler, but the parts makers, and the transplants will take hits due to the loss of suppliers. GM and Chrysler are not isolated players, but major components in a large ecosystem. There are no good answeres here, but the Administration does not appear to have thought this out (how many balls does Geithner have in the air, including the G20?). A miscalculation here would have major repercussions. But Andrew Mellon would be pleased.