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Forced bankruptcy stares at GM, Chrysler

(China Daily)
Updated: 2009-02-10 08:11

General Motors Corp and Chrysler LLC may have to be forced into bankruptcy by the US government to assure repayment of $17.4 billion in federal bailout loans, a course of action the automakers claim would destroy them.

US taxpayers currently take a backseat to prior creditors, including Citigroup Inc, JPMorgan Chase & Co and Goldman Sachs Group Inc, according to loan agreements posted on the US Treasury's website.

The government has hired a law firm to help establish its place at the front of the line for repayment, two people involved in the work said last week.

If federal officials fail to get a consensual agreement to change their place in line for repayment, they have the option to force the companies into bankruptcy as a condition of more bailout aid.

The government would finance the bankruptcy with a so-called "debtor in possession" or DIP loan, a lender status that gives the US priority over other creditors, said Don Workman, a partner at Baker & Hostetler LLP.

"They are negotiating to see if they can reach an agreement," said Workman, a bankruptcy lawyer based in Washington. "If not, they are saying 'We are pretty darn sure that a bankruptcy judge will allow us'" to be first in line for repayment.

Both automakers have dismissed calls to reorganize under bankruptcy protection, saying a Chapter 11 restructuring would scare away buyers and lead to liquidation.

GM and Chrysler are working toward a Feb 17 deadline to show progress on a plan put in place as part of the US loans received in December from the Troubled Asset Relief Program. They must reduce labor costs and show how they will repay the money by next month.

GM and Chrysler are already trying to restructure out of court, cutting labor costs, reducing debt levels and eliminating dealers. GM is in talks to pare $27.5 billion in unsecured debt to about $9.2 billion in a swap for equity.

The company said it plans to shut dealers and reduce obligations to a union retiree health fund by half to $10.2 billion in a separate equity swap. Chrysler Chief Executive Officer Robert Nardelli has said his company will also try to cut debt levels.

January sales from automakers plunged 55 percent at Chrysler, 49 percent at GM and 40 percent at Ford Motor Co.

Agencies

(China Daily 02/10/2009 page14)