General Motors Corp and Chrysler LLC would both need at least twice as much to finance a bankruptcy as they say they need in US government bailout loans, Chrysler and a restructuring expert said.
Chrysler, which said on Sunday it hired the Jones Day law firm to review bankruptcy as an option it later rejected, would need $20 billion for bankruptcy financing — triple its $7 billion loan request — according to a company report to Congress. A GM bankruptcy would cost $40 billion to $50 billion to finance, Edward Altman, a professor at New York University’s Stern School, told Congress on Sunday. GM seeks $18 billion in bailout loans.
“Unfortunately, this traditional loan, even for $18 billion, is inadequate and is destined to fail in the current environment and will likely be followed by additional requests for more rescue funds or a bankruptcy petition,” said Altman. He urged the government to push banks that received other bailout aid to provide needed bankruptcy loans for carmakers.
GM Chief Executive Officer Rick Wagoner had the opposite view of bankruptcy, telling Congress that his company wasn’t pursuing that option to solve its cash crisis because it would scare away buyers and further siphon off revenue, forcing liquidation. Even a government-backed bankruptcy would be too difficult and risky, GM lead director George Fisher has said.
Tony Cervone, a GM spokesman, had no additional comment. GM did hire Weil, Gotshal & Manges, a New York law firm, to advise it on bankruptcy matters, a person familiar with the matter said, asking not to be named. Law firm spokesman Mike Ford didn’t respond to a message seeking comment on the hiring.
Chrysler expressed doubts that banks would fund any so- called debtor-in-possession loans for restructuring, arguing such costs would have to be borne by the government.
“Given the current adverse credit markets, we would not expect DIP financing of such size would be provided by Chrysler’s existing lenders or by any other private source, accordingly the DIP financing would have to be provided by the US government,” Chrysler said in documentation for its loan request.
Without the DIP funding, Chrysler would need to liquidate, closing 29 factories, firing 53,000 workers and cutting off $7 billion in payments to suppliers, the company said this week.
Chrysler hired Washington-based Jones Day and other outside advisers after Congress suggested last month that the industry further study if bankruptcy might be a better alternative than out-of-court restructuring, Chrysler said in a statement.
“The results of this evaluation determined the impact to the overall domestic automotive industry would be devastating,” the automaker said.
Getting $12 billion in government loans and a $6 billion line of credit is part of a GM plan to return to profit by 2011, Fisher said. The company is assuming annual US auto sales will recover to at least 12.5 million vehicles and that GM’s market share remains near 20 per cent, he said.
Cars and trucks sold at an annual rate of 10.2 million units in November, and GM’s market share was 20.5 per cent, research firm Autodata Corp. said on Saturday.
A bankruptcy filing is still “way down the list of options,” should the Detroit-based automaker exhaust all other avenues for help, and the focus is on getting government loans, said Fisher, a GM director since 1996 and former CEO of Eastman Kodak Co.
“We are fearful, very fearful, of a prolonged proceeding that would just destroy our brand in the marketplace and therefore that is not considered a viable option,” he said.
A so-called prepackaged bankruptcy in which the government supports warranties and helps GM fund operations during restructuring is unrealistic, he said. GM has posted almost $73 billion in losses since the end of 2004.
“These Wall Street geniuses and law firms are coming up with all these solutions that make them a lot of money,” Fisher said. “The truth of the matter is that this is so complex, the what-ifs game has so many legs on it, I could spend the next 24 hours talking on the what-ifs.”
