GM bankruptcy would be risky, but looks likely

Roland Jones • Profile • E-mail

Over the next few weeks, General Motors is expected to reach another milestone in its storied 101-year history: bankruptcy.

GM announced early Wednesday that it had failed to cajole enough creditors to accept a 10 percent stake in the company in place of their $27 billion in debt.

Now, the global auto giant that traces its history to the horse-and-buggy era is likely to follow its smaller rival Chrysler into bankruptcy court. It would be one of the biggest Chapter 11 cases ever, analysts and industry observers said.

It won’t be easy and it has plenty of risks for GM, for its investors, for taxpayers and for the economy as a whole.

GM said Wednesday its board will meet to decide its next step ahead of the government-imposed June 1 deadline to produce a plan that would prove it could survive without a bankruptcy filing.

Ironically, observers said, Chrysler’s smooth experience in bankruptcy court so far may be helping GM along the same path. It is being seen as a successful model for a potential GM filing, which would be far bigger and more complex.

“A few months ago, the idea of putting a major automaker into bankruptcy raised fears of things spiraling out of control, but the Chrysler bankruptcy seems to be going well, so right now the idea of bankruptcy seems a lot less frightening,” said Jeremy Anwyl, chief executive of automotive research firm Edmunds.com.

“Of course, GM is a more complicated company, so a bankruptcy here could spin off the rails more easily,” he added. “But I think even with that thought in mind, the idea that Chrysler’s bankruptcy is going so well means they probably think they could easily manage those risks.”

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Chrysler appears on track to emerge from bankruptcy court within the 60-day timeframe announced at the time of the filing. The automaker is due in court Wednesday to ask a bankruptcy judge for permission to sell the bulk of its assets to a group headed by Italy’s Fiat in hopes of saving itself from liquidation.

Attorneys for Chrysler say the Fiat deal is the automaker’s best hope to avoid being broken up and sold off. So far, the judge appointed to oversee the case has approved the automaker’s streamlined bankruptcy process, paving the way for Chrysler to form a new company led by Fiat, but the deal still faces opposition from the automaker’s dealers, bondholders, former employees and others.

Prior to the Chrysler filing, the main fear of putting an automaker into bankruptcy was that customers would not want to make a major investment in a product made by a company with a sullied reputation and an uncertain future. But so far there is no evidence that Chrysler sales have suffered since President Barack Obama announced Chrysler’s bankruptcy on April 30, Anwyl said.

Customer intentions to buy a Chrysler dipped slightly in the week following the bankruptcy announcement. The indicator has climbed steadily since then as Chrysler announced aggressive new sales incentives, Anwyl said, citing survey data. Customer intentions to buy a Chrysler are now back at approximately the same levels as January 2009.

Like Chrysler, GM is expected to go into a government-managed “prepackaged” bankruptcy, in which the government provides so-called debtor-in-possession financing to let the automaker continue its daily operations while the bankruptcy court splits operations between a “good” and “bad” GM.

The idea is that the “good” GM, which would include the automaker’s most competitive brands like Chevrolet and Cadillac, would emerge from bankruptcy within a few months with a cleaned-up balance sheet. The company’s poor-performing brands, like Pontiac and Saturn, and other unwanted liabilities would be left behind in the “bad” GM. Those assets then would be sold or liquidated in a more lengthy restructuring process.

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