General Motors Corp won court approval on its first day in bankruptcy to sell assets as soon as next month after collapsing under $172.8 billion in debt and failing to adapt to consumer demands for smaller cars.
The automaker, the largest manufacturer to seek protection from creditors, also won permission yesterday from Judge Robert Gerber in Manhattan to draw $15 billion from a $33.3 billion bankruptcy loan.
Detroit-based GM plans to form a new company in 60 to 90 days, built around its Cadillac, Chevrolet, Buick and GMC brands in the US The lead bidder for the assets is the US Treasury, which will provide the 100-year-old company with billions in loans that would be converted into a 60 per cent equity stake. GM today said it has an agreement with a buyer for its Hummer sport-utility vehicle unit.
“There’s only one prospective purchaser,” GM attorney Harvey Miller told Gerber, referring to the US government’s offer for the new GM. “There’s no entity that has the wherewithal to bid in these cases.”
The automaker missed Monday's deadline to show that it could reorganise outside of court and reported debt of more than twice the listed value of its assets.
The filing was a “defining moment in the reinvention of GM,” said Fritz Henderson, president and chief executive officer of the carmaker. “The economic crisis has caused enormous disruption in the auto industry.
One idle GM facility in the US will be retooled to make small, fuel-efficient cars as part of an agreement with union workers, GM said May 29. Under the deal to sell Hummer announced today, the identity of the buyer and financial terms aren’t yet being disclosed.
GM’s Saab unit is reorganizing in Sweden. The German government picked Magna International Inc, a Canadian car-parts maker, as the preferred bidder to buy the company’s Opel unit.
The GM Chapter 11 petition makes the carmaker’s reorganization the third-largest bankruptcy in US history, ranked by total assets listed in the initial filing, after Lehman Brothers Holdings Inc. and WorldCom Inc.
“This is a step they should have taken more than a year ago, which could have put them in much better shape,” said Stephen Pope, chief global strategist at Cantor Fitzgerald in London.
GM listed in its petition as top creditors Wilmington Trust Co, representing bondholders owed $22.8 billion; United Auto Workers, owed $20.6 billion; and Deutsche Bank AG, representing bondholders owed $4.44 billion. The Unofficial GM Dealers Committee, which said it represents more than 6,000 US GM dealers, filed a notice that it will take part in the case.
Before declaring bankruptcy, GM received $20.57 billion in US Treasury loans, according to court filings. Administration officials said yesterday the government would advance $30 billion more, with another $9.5 billion from the Canadian government.
“GM and its stakeholders have produced a viable, achievable plan that will give this iconic American company a chance to rise again,” President Barack Obama said on Monday. The government was becoming a “reluctant” owner of the automaker, Obama said, adding that his goal was to “take a hands-off approach and get out quickly.”
GM said on Monday that the new company would have total debt of $17 billion, excluding liabilities such as a workers’ health-care trust. The filing said the loan total from the US and Canadian government could grow to as much as $65 billion.
Chrysler LLC, the automaker that filed for bankruptcy April 30, listed $39 billion in assets in its petition. The Auburn Hills, Michigan-based carmaker plans to transfer most of its assets to a new entity run by Italy’s Fiat SpA. Another bankruptcy judge in New York approved that deal May 31.
Aside from the U.S. government’s equity share, GM’s statement called for a worker health-care fund to get a 17.5 per cent stake and the Canadian government to take 11.7 per cent. Bondholders would be eligible for 10 per cent and warrants to buy another 15 per cent.
There would be no initial public trading of the shares, some of which will be given to the Canadian government in exchange for loans, an administration official said last week. The company might remain private for as long as 18 months, said the official, who asked not to be identified.
Because of its size, GM faces more obstacles than Chrysler in resolving creditor claims that remain in bankruptcy after the new company is created. Reeling from almost $88 billion in losses since 2004, GM may not return to profitability if US vehicle sales are below 10 million a year, an amount the government said a new GM will need to break even.
GM filed a request to sell most of its assets to a Treasury-sponsored entity that will hold the government’s stake in the company. GM’s board of directors said in court papers that an asset sale to the Treasury is “expedient.”
Of the government funding, “approximately” $30.1 billion in new money will be advanced by the Treasury, according to the filing.
GM’s Saturn LLC and Saturn Distribution Corp. also sought court protection yesterday. The Chapter 11 petitions are the “only opportunity for preserving” the Saturn brand, according to the filings.
“Just a couple of months ago, it was predicted by some that a bankruptcy filing by GM would inevitably lead to its demise,” said Lynn Hiestand, a lawyer specialising in restructuring with Skadden, Arps, Slate, Meagher & Flom LLP. “That remains to be seen.” Hiestand’s firm represents Delphi Corp, GM’s former parts unit, in a separate US bankruptcy.
The automaker was founded in 1908 by William “Billy” Durant, who bought more than 20 car companies before being ousted in a 1920 bailout by Pierre Du Pont and JP Morgan.
By the 1960s, GM controlled more than half the US vehicle market. In 2008, it sold only 8.35 million cars worldwide, losing its place as the world’s biggest automaker to Toyota Motor Corp as customers opted for the Japanese carmaker’s fuel- efficient Corolla and Camry brands instead of GM’s light trucks and Hummers.
GM will introduce several vehicles in 2009 and 2010, the company said, including the Chevrolet Camaro, the Buick LaCrosse, the Cadillac SRX and CTS Sport Wagon, the Chevy Equinox and the Chevy Cruze, GM’s “new global compact car.”
Also scheduled for production is the Chevy Volt, “an extended-range electric vehicle that can travel up to 40 miles on battery power alone with the extended-range capability of more than 300 total miles,” the company said. Monday's filing will trigger credit-default swaps protecting about $3.1 billion of GM debt, in the biggest settlement of the derivatives since September’s collapse of Lehman Brothers. Pricing reflected the risks last week as dealers charged about $8.7 million upfront and $500,000 annually to protect $10 million of debt.
Banks such as JPMorgan Chase & Co secured GM’s revolving loan of about $4.5 billion with inventory, receivables and factories, also providing a $1.5 billion term loan.
The automaker agreed to buy back ownership of Delphi plants in Wyoming, Michigan; Lockport and Rochester, New York; and Kokomo, Indiana, according to a Delphi statement on Monday.
The requests approved by Gerber include permission for GM to honor vehicle warranties and dealer-incentive programs, the company said in a statement. GM said it also won approval to meet obligations to employees and retirees as well as fulfill financing agreements and pay “essential suppliers.”
Gerber also presides over the bankruptcies of Lyondell Chemical Co and BearingPoint Inc. He handled the Adelphia Communications Corp and Global Crossing Ltd cases as well.
The judge said objections to the sale must be filed by June 19 and set a deadline of June 22 for competing bids.
“The gravity of the circumstances cannot be overstated,” GM said in court papers. “The business and assets to be transferred are extremely sensitive and will be subject to major value erosion unless they are quickly sold and transferred to New GM.”
The case is In re General Motors Corp, 09-50026, US Bankruptcy Court, Southern District, New York (Manhattan).
