Lessons for GM from Chrysler
May 11th, 2009As I mentioned in a recent post Legal Issues Affecting Chrysler:
…the dissident lenders have a valid complaint. Unfortunately, they are swimming upstream. They are not only in the minority among Chrysler’s creditors in opposing the Fiat deal, but in the minority among their own class of creditors (the total group of first lien holders including the likes of Citigroup and JP Morgan).
Sure enough, a few days later, many of Chrysler’s dissident lenders dropped their opposition to the Fiat/Chrysler deal (see Chrysler Lenders Drop Opposition). According to the Washington Post:
The small but staunch lenders group that stood against the sale of Chrysler disbanded Friday, removing the only major obstacle in the Obama administration’s plan to quickly restructure the automaker in bankruptcy court.
The breakup of the organized opposition improves the government’s odds of getting Chrysler out of bankruptcy quickly and could portend a similar road for General Motors should it also be forced to file for protection.
Now that Chrysler’s dissident lenders have caved, it is becoming increasingly likely that Chrysler’s bankruptcy will be a surgical one after all, contrary to my initial expectations (see Chrysler Bankruptcy: Anything but Surgical). I did not anticipate that the dissident lenders would so quickly reach their legal fee threshold.
…the legal costs…were a factor in dropping the public objection.
Irrespective of their financial wherewithal, dropping their opposition to the deal was probably a wise decision on the part of dissident creditors. They saw the writing on the wall. They weren’t going to win. And it’s no fun taking on the federal government, …even in the best of circumstances.
But now the question becomes: What does this all mean for GM?
Several weeks ago, in an Op-Ed for Advertising Age (subscription only, see GM and Chrysler: Finally a Sensible Approach or Ad Age Op-Ed for background) I wrote:
Should Chrysler go bankrupt (a likely outcome), the federal government gets to play a strong hand against GM. Allowing Chrysler to go bankrupt should be enough to wake up GM’s creditors and the UAW to the reality that US taxpayers will not support them indefinitely. It therefore acts as a signal to GM that the Obama administration is serious.
Sure enough, in a press conference held today, Fritz Henderson, CEO of GM, admitted that keeping GM out of bankruptcy will be difficult (see GM CEO Says Tasks are Large). From the Associated Press:
Bankruptcy protection for the biggest U.S. automaker is becoming more probable with a deadline just over two weeks away, the company’s top executive told reporters Monday.
General Motors Corp. CEO Fritz Henderson is still holding out hope that the company can restructure without court protection, but he says the tasks to complete before a June 1 government-imposed deadline are large.
“Certainly the task that we have in front of us is large,” Henderson said during a conference call to update the company’s restructuring efforts. “There is still an opportunity and still a chance for it to be done outside of a court process.”
…the company must reach concessionary agreements with unions, persuade thousands of bondholders to exchange $27 billion in debt for 10 percent of GM’s stock, cut thousands of dealers, close plants and lay off more salaried workers.
Of all stakeholders, the largest impediment to an out-of-court restructuring will come from GM’s bondholders, as was the case with Chrysler (although in Chrysler’s case there were only bank lenders, not bondholders). According to the Associated Press:
GM cannot modify its stock exchange offer to bondholders because the company has been told by the Treasury Department that it cannot go above 10 percent of the company’s equity, Henderson said.
A committee representing the bondholders has counteroffered seeking a 58 percent ownership stake.
Here we go again. As with Chrysler, the senior creditors want one thing, and the government wants something else. So does the federal government get GM bondholders to accept a massive haircut of the type that they were effectively able to cram down the throats of Chrysler’s lenders?
This is where Chrysler’s situation and GM’s situation diverge.
Although the debt restructuring problems they both face are the same in theory, in the case of Chrysler, it was much easier for the federal government to get Chrysler’s lenders to accept a haircut because the majority of its first lien debt sat with banks that accepted TARP money (e.g., Citigroup and JP Morgan). The government could therefore exert tremendous influence over these lenders.
Not so in the case of GM. GM’s bondholders are a much more diffuse bunch with disparate interests. Moreover, the government has much less of a direct influence over GM’s bondholders.
GM is obviously a much larger organization than Chrysler. So sorting out the details in bankruptcy will therefore be more complex. Nevertheless, be prepared for a longer, more drawn out, more complex negotiation with bondholders for GM than for Chrysler, unless the Obama administration can find some way to effectively use outcomes of the Chrysler case to convince GM’s bondholders to take their medicine outside the court system (e.g., by demonstrating the triumph of the “fresh start” provision over the the “absolute priority” rule – see Legal Issues Affecting Chrysler).
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