Time Is Running Out for GM and Chrysler

The two struggling automakers have got to cut deals and prove their viability, or face bankruptcy. They need to speed things up

By David Welch

Say what you want about the United Auto Workers. But at least at the UAW there's one guy—the union's president, Ron Gettelfinger—whom you can bargain with to cut a deal.

Not so among the creditors of Chrysler and General Motors (GM), both of which are in a tight race against the clock to get their respective lenders to slash long-term debt. Both companies not only face resistance, but their lender groups have multiple players with varying interests and opinions.

To get guaranteed government funding to avoid bankruptcy, GM and Chrysler must both get their union and lenders to make big concessions. GM wants to get its bondholders to trade most of the value of their bonds for stock. Chrysler and the U.S. Treasury Dept. have offered the automaker's lenders $1 billion in new debt for the $7 billion it owes them.

GM has a tough challenge with the thousands of bondholders who hold its $28 billion debt. Treasury wants GM to get roughly 90% of them to take a massive cramdown—which could be anything from an all-equity deal to less than 10¢ on the dollar and the rest in stock—to make the company viable. If that doesn't happen, Treasury might force GM into bankruptcy.

Trading for Pennies

But bankruptcy is becoming more likely as GM is worried that it may not be able to get anywhere near 90% of the debt restructured. As a practical matter, it's tough to reach all of the thousands of bondholders and get them to accept a debt-to-equity conversion offer by Treasury's June 1 deadline. The group changes as the bonds trade hands, and many are held by individual investors, points out a source close to the situation.

One bondholder is Geoff Glatt, who works as an auditor in Harrisburg, Pa. Glatt bought the bonds last June at 68¢ on the dollar after Pimco founder Bill Gross recommended them in Barron's that month. Now the bonds are trading at 9¢, and Glatt hopes to get more than pennies on the dollar. Moreover, he's not crazy about the stock.

"Ford (F) offered 38¢ on the dollar for its unsecured debt. That seems fair. I'd even be happy with 25¢ at this point," says Glatt. "If I wanted stock, I would have bought it." He says he's waiting to see what GM and the Treasury will offer.

So even if the ad hoc committee representing bondholders gets its members to accept, GM and the Treasury will still have many more people to convince. The ad hoc committee (whose counsel is law firm Paul, Weiss, Rifkind, Wharton & Garrison) represents only about $12 billion of the $28 billion in debt.

Traditional Bankruptcy Still Possible

That's why bankruptcy is a possible outcome. GM has even been preparing for a filing, and proceedings could be simple if enough bondholders agree to a deal up front. If GM gets two-thirds of the bondholders to accept an offer of, say, 10¢ on the dollar plus some stock before filing, the bankruptcy judge could legally force that deal on the remaining bondholders.

In that case, says one source close to GM, the company wouldn't even have to split GM into a "good GM" and a "bad GM." That has been the prevailing wisdom so far, that GM would put Chevrolet, Cadillac, and perhaps Buick and GMC into a "good GM" and load the weak brands, bond debt, and closed factories into the "bad GM" for liquidation.