A bankruptcy filing by General Motors Corp could allow the struggling automaker to reduce its debt more aggressively than an out-of-court restructuring and might not be as damaging as it would have been just a few months ago, an analyst said on Monday.
“We think the damage to the enterprise of a GM bankruptcy today is notably less than it would have been a few months ago, largely because of public desensitization to a bankrupt carmaker,” JP Morgan analyst Himanshu Patel said in a note for clients. Patel’s note raises the possibility by a prominent Wall Street analyst of the renewed threat of a bankruptcy by GM or Chrysler, a risk many observers believe had been sharply reduced by the government bailout.
GM, like its smaller rival Chrysler LLC, faces a Feb. 17 deadline to submit new restructuring plans to the US government under the terms of the $17.4 billion rescue provided to the struggling automakers. GM has said it is aiming to reduce its unsecured US debt by about two-thirds from nearly $28 billion to $9 billion. The company also plans to halve the $20 billion it has promised to a health care trust fund affiliated with the UAW by offering equity instead of cash.
But Patel said the diminished threat of a bankruptcy filing by GM appeared to have removed a key incentive for bondholders to offer concessions. “After the GM bailout, GMAC received aid, GMAC received bank holding status without achieving required funding levels (and) Chrysler and its (financing company) received aid,” Patel said. “All of these steps by the government were likely to have emboldened bondholders.”
“POLITICAL LIGHTING ROAD”
Patel said that if GM fails to win substantial concessions from bondholders and the UAW, the bailout could become “a political lightning rod” for the Obama administration. “We are increasingly thinking that such a development might force the White House to more seriously consider allowing GM/Chrysler to go into bankruptcy,” he said.
GM has repeatedly ruled out seeking bankruptcy protection, saying such a step would scare off consumers, cause its revenues to plummet and risk that a Chapter 11-style restructuring would end up as a liquidation of its assets. But some critics of the US bailout for the auto industry have said that the government could provide bankruptcy financing for GM or Chrysler and allow them to win deeper concessions from creditors and the union.
The US Treasury has retained two law firms with extensive bankruptcy experience and the investment bank Rothschild to advise officials on the taxpayer-backed restructuring of GM and Chrysler. One of the scenarios those advisers will consider will be a government-assisted bankruptcy filing, a person with direct knowledge of the work has said.
Another of the other immediate priorities will be working out an agreement between other creditors and the government that would provide senior status to the public funding, a second person involved in the discussions said.
JP Morgan’s Patel said a bankruptcy filing by GM would likely cut the automaker’s debt by over 60% compared with just a 25% cut in indebtedness under an out-of-court restructuring. (Reuters)