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For GM, Bankruptcy Is Termed More Likely Than Not

A leading Wall Street analyst said Jan. 13 that he doesn't think General Motors (GM) will be able to restructure its debt to the satisfaction of the U.S. Treasury, which is lending the company billions of dollars, without the help of a federal bankruptcy judge.

"The chances are greater than not that there will be bankruptcy, at least for GM," said Rod Lache, auto analyst for Deutsche Bank (DB), speaking in Detroit at a conference sponsored by the Society of Automotive Analysts during the North American International Auto Show. "But it won't be the disruptive, scary bankruptcy that suppliers fear."

Lache's call came a day after GM Chairman and CEO G. Richard Wagoner Jr. could only say that he hoped to "avoid bankruptcy" and admitted that proving the company's financial viability to lawmakers in time is "not certain." GM officials did not return phone calls at press time to respond to Lache's comment.

Car Czar Call

GM last month accepted $9.4 billion in emergency loans from the U.S. Treasury and is hoping to get another $4 billion next month. But according to the plan laid out by Treasury, GM and Chrysler (which received $4 billion), have to prove viability, as determined by a yet unnamed "car czar," by Mar. 31. If they fail, the emergency loans are callable by the government and the companies will be allowed to enter reorganization under federal bankruptcy laws.

Ford, the least financially troubled of the three, has applied for a $9 billion line of credit from the Treasury, but has not asked for any loans. Ford, too, has to prove financial viability to qualify for the credit line.

Lache said GM must restructure its $62 billion in debt, including converting $30 billion in unsecured debt into $10 billion in new bonds, secured by hard assets, and $20 billion in equity. But about 20% of unsecured bondholders won't convert voluntarily, he said. "GM must get a bankruptcy court to order that."

GM, as well as Chrysler and Ford (F), have been saying for months that a bankruptcy would spell disaster for the companies, because the public would lose faith in a car company that was in Chapter 11. "It wouldn't be reorganization…it would be liquidation," Wagoner said in December in congressional testimony.

Urgency Lost

Lache's pessimism regarding GM was echoed by Senator Bob Corker (R-Tenn.), who was touring the auto show on Jan. 13. Corker said "the sense of urgency of the problem was lost when legislation failed last month that would have spelled out what had to be done." Corker was referring to a bill that he worked on, which laid out in specific terms what the United Auto Workers and debt holders had to agree to in order for GM and Chrysler to show financial viability.

The wild card for GM and Chrysler is who the incoming Obama Administration will tap as the car czar and how much discretion he or she applies to determining "financial viability." President-elect Barack Obama has made it clear that he doesn't want to see GM, Chrysler, or Ford go bankrupt or fail, and see the economy suffer potentially millions of lost jobs while the economy is already in recession.

One name that has surfaced as a candidate for czar in the last week is Steven Rattner, co-founder of private equity firm Quadrangle Group. Rattner, 56, is a former New York Times reporter who started Morgan Stanley's (MS) acquisitions group in 1984 and moved to what was then Lazard Frères before creating Quadrangle in 2000. "He fits the bill," said Lache. "He is a fund manager. He can look at a plan and say it does or doesn't make sense."

However, Chrysler's ownership could raise questions about Rattner's acceptability. The carmaker's majority owner is private equity firm Cerberus Capital Management, which also is among the lenders to Alpha Media Group, one of Quadrangle's holdings.

A spokesman for Rattner declined to comment.

Kiley is a senior correspondent in BusinessWeek's Detroit bureau.

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