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http://www.nytimes.com/2009/04/01/business/01bankruptcy.html?em
U.S. Hopes to Ease G.M. to Bankruptcy
By MICHAEL J. de la MERCED and JONATHAN D. GLATER
Published: March 31, 2009
U.S. Hopes to Ease G.M. to Bankruptcy
By MICHAEL J. de la MERCED and JONATHAN D. GLATER
Published: March 31, 2009
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. Many regard the government as the only lender willing to step up with money — in bankruptcy or out.
“They’re going to have tremendous power,” said Lynn M. LoPucki, a law professor at the University of California, Los Angeles. “They can call off the money and the whole thing fails.”
G.M.’s new chief, Fritz Henderson, also said that the pressure from the government pushed the automaker closer to bankruptcy.
“By no later than June 1, if we’re not able to accomplish this outside bankruptcy, we’ll be in bankruptcy,” he said at a news conference in Detroit on Tuesday. “It’s pretty clear. The government was unequivocal.”
The effort is a new role for the government, which has not pushed companies into bankruptcy in the past as much as it has stepped in when all else fails.
“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. He worked on big bankruptcy cases like those of Eastern Airlines and LTV Steel.
The administration appears to be drawing in part from a playbook used with troubled banks, with the goal of creating a new, healthier G.M., but leaving behind its liabilities and less valuable assets, perhaps for liquidation. More often referred as the “good bank-bad bank” model, the approach can infuriate those with claims against the bad bank.
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 plans are still being discussed, and the details are subject to change, people familiar with the talks said.
G.M. joins a long list of companies in industries like airlines, railroads and steelmakers that have faced the prospect of being remade in bankruptcy. Typically, a troubled company usually seeks to line up creditors, employees and other stakeholders for a plan of reorganization before a bankruptcy filing. Failure to achieve this agreement can create a prolonged and messy court process as the company battles its creditors while its business and financing rapidly deteriorate.
Elements of the government’s plans for G.M. are in some ways similar to the demise of Lehman Brothers last fall. A day after filing for Chapter 11 protection, the securities firm agreed to sell the bulk of its North American business to Barclays Capital, the British bank. The sale was completed in a little more than three days.
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.
While the automaker would not be the biggest company ever to file for bankruptcy protection — Lehman holds that dubious distinction — it is woven into a complex international web of suppliers and subsidiaries. One goal of any reorganization plan would be to minimize disruption to other businesses.
“This would rank as one of the most, if not the most complex bankruptcy in history,” said Stephen F. Cooper, founder and former chairman of Zolfo Cooper, a turnaround firm. Mr. Cooper, who ran Enron during its bankruptcy, added that politics would influence any plan.
There will be pressure to keep plants open, to keep employment in communities high, he said, “because typically G.M. or Ford or Chrysler are very substantial contributors to the local tax receipt flow.”
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.
Delphi used a bankruptcy judge’s threat to void union contracts to wring concessions out of its workers, said Gary N. Chaison, a professor of industrial relations at Clark University in Worcester, Mass.
“That’s a very potent threat, to withdraw from the collective agreement in bankruptcy,” Mr. Chaison said.
Several airlines also used bankruptcy proceedings to force unions to modify agreements. Continental Airlines took that step before its rivals, to its advantage, Mr. LoPucki said. But much of Continental’s work took place before changes in bankruptcy laws made it more difficult to void worker contracts.
There are critical differences between the airlines and G.M. There was no question of the demand for air travel in the United States, while critics of American automakers have questioned whether there is demand for their products and whether reducing costs will produce viable businesses.
The government’s plan to dictate terms as the provider of G.M.’s bankruptcy financing — known as a debtor-in-possession loan — is not without risk.
“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.
