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Chrysler, GM Bankruptcy Prospects Deter Buyers

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One of our oft repeated pet peeves has been that the effect of a bankruptcy filing on buyer appetite had not been assessed in the Chrysler or GM bankruptcy plans. We had argued it was vital to get a handle on it, since it would affect how much financing would be required in court and whether a protracted bankruptcy process would produce enough damage to turn a Chapter 11 filing into a Chapter 7 liquidation.

Note the focus of our concern was not Chrysler (we had assumed that even if a BK dragged on, perhaps optimistically, that key businesses still could have been hived off). Fortunately for Team Obama, that Rubicon did not have to be crossed. The Chrysler judge is allowing the fast track process to proceed.

The real risk is GM, This would be the most complicated BK ever, and the idea that the Administration can muscle through a fast process is much more of a stretch. Some informed readers have confirmed our views. From reader Aiden:

Obama Auto Task Force seems much too optimistic about the success of a 363 sale and the outcome of the BK…

It appears to me that the Senior unsecured bondholders will be able to block the 363 sale and force a better deal, possibly with the PBGC taking over their monster pension liabilities, and a total wipeout (turned to equity) of the VEBA instead of the current deal which gives a more than 50 cents on the dollar recovery for what is contractually an unsecured note. This may also allow them to push for more concessions on the contract front and much more needed firings of white collar employees…

Another fly in the ointment are the European Opel/Vauxhall and Korean Daewoo operations which are money losers and have the same overcapacity problems that GM North America has.

As we have indicated, a more typical Chapter 11 process for GM would take nearly two years, Consider what happened to Chrysler, per the New York Times:

Americans are hardly in a car-buying mood, and people who are shopping are steering clear of Chrysler showrooms.

Part of the reason is the cloud of bankruptcy hanging over the company. General Motors, which is also on the brink of filing for Chapter 11, is also losing customers because of its fragile financial condition and uncertain future.

Some readers had asserted that buyers would not be deterred by a bankruptcy filing. That is clearly not the case.

A protracted bankruptcy would mean much more significant sales erosion (think of the impact of ongoing headline on buyer perceptions). That in turn would increase the costs of funding GM while in court and raise the odds that the company simply does not make it and is substantially liquidated.

Team Obama had better hope Plan A works.

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2 comments

  1. Erick

    I understand your view that it is more expedient for Obama’s administration to avoid a bankruptcy filing.

    The principles behind avoiding bankruptcy are a little hazy for me.

    How do we know whether people’s concern is bankruptcy, versus disgust over what they perceive to be Obama overstepping his bounds (Detroit News):

    42 percent of poll respondents [in Michigan] say Obama’s role has hurt the domestic automakers while 39 percent say he’s been helpful […] “The federal government is overstepping what it is supposed to be doing with private business,” said Katrina Hopkins, 48, a stay-at-home mom from Pontiac who participated in the survey conducted last week by EPIC-MRA in Lansing. “The government helped to create the auto crisis.”

  2. buzzp

    I have a nine year old Saab, 110K – went to look at replacing last September at Saab dealer in Kingston, NY – thought about the potential GM bankruptcy, and wanted to see 09 models, so delayed – went back 60 days later to find dealer closed (after several decades, a real mid-Hudson institution, as Saabs are popular up there) – switched service to a dealer in Queens, who has since bombarded me with great deals (very tempting) on any model we want – but we have put any buy plans on hold til we see what happens to GM and Saab – and I don’t think I’m alone in this

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