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GM, Chrysler face decisive week as deadlines loom
2009-05-24
WASHINGTON (AFP) - The US auto industry faces a tumultuous week that could see sector leader General Motors forced into bankruptcy and number three maker Chrysler move toward a quick exit from court protection. A consensus is growing that GM -- which faces a June 1 deadline from the US government to come up with a viability plan or face an aid cutoff -- will seek bankruptcy court protection even as it scrambles to win last-minute concessions. GM reached a tentative deal with the United Auto Workers union on cost-saving concessions that still must be ratified by rank-and-file workers. It also has set a deadline Tuesday for holders of some 27 billion dollars in GM debt to make concessions as part of a plan to emerge leaner in the face of depressed auto sales and a weak economy. Douglas Bernstein, a Michigan lawyer who represents auto suppliers in the Chrysler case, said bondholders face intense pressure to make concessions after the Chrysler case, which forced hefty writedowns on lenders. "If you are a GM bondholder, you have to understand the real risk is you can end up with nothing or next to nothing," he said. GM's financial woes dwarf that at Chrysler, which had fewer than 100 main financial creditors. At GM, any debt-for-equity exchange must involve more than 120 major financial institutions, ranging from banks to pension funds, and about 100,000 individual investors. GM, which is funding its operations with more than 15 billion dollars in emergency government loans, has said it would work to restructure either in or out of court with the same goals. In late March, President Barack Obama gave GM 60 days to come up with a "more aggressive" cost-cutting plan to keep government funding and avert bankruptcy. But legal experts say that even if GM wins cost savings, it may seek bankruptcy protection to stave off lawsuits from dealers that would be shut down. GM wants shrink its dealer network 40 percent, cutting some 2,300 sales outlets by the end of 2010. "They have to file because they can't deal with the dealer network outside bankruptcy," said one bankruptcy attorney familiar with the Chrysler case and the auto industry, who spoke on condition of anonymity. "There's no way GM can resolve its dealer network outside bankruptcy. They would have to find a big bag of money to pay off the dealers and no investors would want to do this." Chrysler meanwhile awaits a critical bankruptcy court ruling Wednesday that could give the struggling automaker a fresh start in partnership with Fiat, but it still faces a long and difficult road. Judge Arthur Gonzalez was expected to rule on Chrysler's plan to sell its main assets to a new entity including Fiat, which could allow the "quick rinse" reorganization sought by the Obama administration. The ruling could allow Chrysler to emerge quickly following its bankruptcy filing as a new firm led by Fiat but majority owned by the United Auto Workers (UAW) union, with small stakes held by the US and Canadian governments. Bruce Belzowski of the University of Michigan Transportation Research Institute said the Chrysler-Fiat venture faces a number of challenges. If Chrysler can wipe out a large portion of its debt and start fresh with the Italian automaker, "it just puts them back in the game and the game is a very tough one," Belzowski said. "Even before the recession it was extremely difficult for the US manufacturers." Others say it is possible for the automakers to turn around after wiping out debts and other costs. "I see the economy bottoming out sometime in the second half of the year, and this would bring some modest upward trajectory in car sales later this year," said Dana Johnson, chief economist at Comerica Bank. "So we have a strong likelihood of an economic recovery that will push car sales to a level that will allow these companies to do a lot better." David Cole, chairman of the Michigan-based Center for Automotive Research, said the Detroit firms would do better after making painful cuts to bring down capacity and squeeze out legacy costs. Cole said the automakers have managed to slash costs to get to a break-even point with a market of some 10 million new vehicles annually, down from recent levels of 15 to 16 million. As a result, he said, with an uptick in sales to 13 or 14 million, "this is going to become a very profitable industry."
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