Meltdown 101: GM vs. Chrysler bankruptcy
First it was Chrysler. Now General Motors looks headed for bankruptcy court.
The nation’s largest automaker is expected to file for Chapter 11 bankruptcy protection within days, as part of a new government plan to create a leaner GM and erase the company’s unsecured debt. Chrysler, meanwhile, is hoping to emerge soon from its own reorganization in bankruptcy court.
The automakers, two of America’s most iconic companies, need court protection to cut debt and revamp operations free of creditors’ clutches. That way, they hope, they’ll emerge more competitive once the economy rebounds.
So what should you expect from a GM reorganization in bankruptcy court? Will it be different from Chrysler’s? Does one company’s case provide a roadmap to what might happen to the other?
Here are some questions and answers about Chrysler, GM and bankruptcy court.
Q: What are the two companies hoping to get out of reorganizing in bankruptcy court?
A: In short, a new life.
Keeping both companies alive is considered a top priority by the federal government since hundreds of thousands of jobs depend on the U.S. auto industry. So the federal government, which is loaning billions to both companies, hopes that a court-approved reorganization can keep Chrysler and GM from bleeding money and eventually remake them as strong players in the world auto market.
Q: How would a GM bankruptcy reorganization be different from Chrysler’s?
A: The major difference is size.
As the nation’s largest automaker, GM would be one of the nation’s biggest bankruptcy protection filings ever. GM made twice as many autos as Chrysler did last year (3 million versus 1.5 million), employs 235,000 people compared with Chrysler’s 54,000, and has plants and operations in many more countries.
GM, which sells GMC vans, Buicks, Chevrolets, Pontiacs and Cadillacs, also has far more brands than Chrysler, which sells under the Jeep, Dodge and Chrysler brand names. (Though GM has said it plans to eliminate the Pontiac brand.)
Q: So what is the significance of GM’s size in a bankruptcy case?
A: It means unraveling GM will be much more complicated than reorganizing Chrysler.
GM operates worldwide, selling cars in 140 countries and owning overseas brands like the Sweden’s Saab, Britain’s Vauxhall and Germany’s Opel.
Separate deals will likely have to be struck to resolve issues related to GM’s overseas holdings, and the German government is already trying to shield Opel and its 25,000 workers from a possible GM bankruptcy. GM will also likely have to navigate the bankruptcy law of the countries where it has plants and other facilities as it works to restructure.
A clear illustration of the difference in scale between GM and Chrysler is how much money will be spent on lawyers, consultants and others who will work on the two cases. Lynn LoPucki, a UCLA law school professor who has studied fees from 102 large public bankruptcies, estimates that fees in the Chrysler case will reach around $573 million. That’s a huge sum, but consider the estimate for GM: $1.9 billion.
Q: How will these cases play out?
A: Both companies owe a lot of money and have received about $25 billion in government loans. The bankruptcy court will determine how the creditors get paid and in what order.
For Chrysler, that means figuring out how to deal with $6.9 billion in debt. For GM, it’s trickier. On Wednesday, GM failed to persuade holders of $27 billion in bonds – GM debt – to exchange them for a 10 percent equity stake. (In other words, ownership of a portion of GM.) The idea was that this would have improved the company’s health by reducing its debt.
The U.S. Treasury came back with a plan to sweeten the deal Thursday. Whether or not the bondholders accept it, though, it’s still a near certainty that GM will need to file for bankruptcy protection.
It will also be up to the courts to approve the automakers’ restructuring plans. Chrysler seeks an alliance with the Italian automaker Fiat and big ownership stakes for the United Auto Workers union and the federal government. GM has proposed handing over ownership to the UAW and its debt holders, along with a whopping 70 percent share to the federal government.
Other parties also have a stake in the cases, including the auto parts suppliers who may be owed money, the network of dealers that rely on the automakers for their stock, and employees and retirees worried about their jobs and preserving their benefits.
Q: With Chrysler going first, does it provide a blueprint for GM?
A: It does in some ways. Chrysler hopes to zip through its case in just 30 days, near light speed for a bankruptcy case. If that works out, GM may look to try to do the same so that it can exit bankruptcy quickly. The Obama administration thinks GM can finish its case in between 60 to 90 days.
GM may look to the Chrysler case to figure out what court to file in. Chrysler has made rapid progress in a New York federal bankruptcy court, and could be finished within the next several weeks. If the case continues to go well, GM may file there, LoPucki said. If it doesn’t, GM could go elsewhere, like Wilmington, Del. – a jurisdiction that’s known for handling big corporate bankruptcies.
One reason the Chrysler case has gone so smoothly is that there is already another company, Fiat, lined up to help it recover. In GM’s case, there isn’t such a deal. Some experts think the GM case will move more slowly as a result.
Q: What does bankruptcy mean for me if I own a GM or Chrysler or if am thinking about buying one?
A: Even though the companies face some big legal hurdles, you probably won’t notice it much. Both are still selling cars, though they have announced plans to sharply cut back on the number of dealers they work with. And the U.S. government has pledged to back the warranties from both companies to reassure buyers.