GM: Give Us More Money Or We Go BK

On February 5th I had a short post that noted GM was falling behind on the survival plan it is required to submit to the government on Tuesday. The lack of a car czar was blamed for slowing discussions with its bondholders and unions. Now, according to the Wall Street Journal, it appears as if there will not only be no firm plan but that GM is going to give the Obama administration an ultimatum. More money or we go Chapter 11.

Treasury Department officials believe GM needs at least $5 billion more in U.S. loans to keep operating beyond the first quarter, said people familiar with the situation.

The call for additional funds will be a key part of the revitalization plan GM is required to file with the Treasury by Tuesday, though it is unclear whether GM will furnish a dollar amount, said people familiar with the matter. The plan is supposed to describe how the company will become self-sustaining and better compete with foreign rivals.

But it’s increasingly unlikely GM will have a finished plan in time. Negotiations with GM’s unions and bondholders haven’t yet produced commitments to concrete concessions as required by terms of the federal loans; talks are expected to continue over the holiday weekend. People involved in the talks say progress has been slowed by the fact the Obama administration has yet to appoint a “car czar,” as envisioned by the bailout program.

So far, GM has a commitment from the government for $13.4 billion in direct aid. It has also received around $3 billion in tax relief related to the bailout and, I believe, an additional $2 to $3 billion in extended loss carryback tax relief that was part of the stimulus bill. In other words a lot of taxpayer money that at this time appears not to be adequate to solve the problem.

When negotiations commenced with the government, GM was adamant about not utilizing Chapter 11 as a means of reorganization. The argument was that it would be the death knell for the company as customers would shun their products. Apparently, management has had an epiphany.

Rick Wagoner, GM’s chairman and chief executive, once fiercely opposed a bankruptcy filing, saying it would scare off customers. But his opinion has softened, and he has been influential in shaping the plan for a possible filing, said people involved in the strategy.

GM declined to comment.

GM’sboard began more seriously considering bankruptcy in November as the company’s liquidity headed toward unsustainable levels. In early December, at the board’s prompting, Mr. Wagoner hired bankruptcy lawyers and advisers to begin preparing a contingency plan, said people familiar with the matter.

In the months that followed, these bankruptcy experts worked alongside advisers Evercore Partners and Morgan Stanley, both of which previously worked for GM, to develop multiple options for GM’s future.

One plan includes a Chapter 11 filing that would assemble all of GM’s viable assets, including some U.S. brands and international operations, into a new company. The undesirable assets would be liquidated or sold under protection of a bankruptcy court. Contracts with bondholders, unions, dealers and suppliers would also be reworked.

If GM were to pursue the bankruptcy option that doesn’t mean that the government would be off the hook. The company would require debtor-in-possession financing of fairly massive amounts and the only source for that right now is the federal government. It’s almost inconceivable that it would not be forthcoming given that the government already has substantial sums at risk and an outright liquidation via chapter 7 is not viable politically.

So how is this going to play out next Tuesday. The speculation is that some sort of plan, long on promises and short on specific accomplishments so far, will be presented along with the need for more money.

GM’s viability plan will present a restructuring strategy allowing it to be profitable in each of the regions in which it operates globally, people who have seen the plan said. The plan will include broad restructuring targets, including more than 10 plant closures in North America.

While GM’splan will include updates on talks with unions and bondholders related to concessions, the auto maker is expected to ask for leeway on when it can provide specific details about what cuts the two parties are willing to make.

Negotiations with the United Auto Workers union and a bondholders committee have been slow for several reasons. For one, both expressed frustration over the amount of sacrifice they are being asked to take, compared to other stakeholders such as dealers and even asbestos litigants. And both argued that a car czar is needed to help expedite the talks.

UAW President Ron Gettelfingerhas been asking the Obama administration for more time to negotiate with the auto makers. Mr. Gettelfinger, a strong supporter of Mr. Obama’s presidential campaign, is also hopeful that the government will take responsibility for some of GM’s $47 billion in retiree healthcare obligations, said people familiar with his thinking.

Just an aside, but Chrysler appears to be closer to attaining a viable plan to present on Tuesday. That may be due to the involvement of Fiat or to the fact that as a smaller, privately owned company it is easier to hammer out the details. It might also indicate that the problems at GM are larger and more intractable than anyone either imagines or is willing to admit. Chrysler is expected to say that it too will need more money. It says $3 billion is what it intends to ask for.

The Obama administration and Congress are between a rock and a hard place on this one. They are too deeply in debt to the unions to allow the bankruptcy option. Both GM management and the unions know this and so use it to pry ever more amounts of money out of Washington. The creditors sit back and know that all of this works to their advantage as well. Therefore, look for more government financial backing, an extension of the March 31 deadline and Lord knows what else down the road.

Take heart, with enough cheap government financing GM could be the most profitable car company in the world.

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