Auto Rescue May Be a Bridge to Nowhere

As posted by: Wall Street Journal

Sometimes, hard choices have to be forced. That is a beauty of bankruptcy court, where a judge can require investors, creditors, employees and management to reach difficult compromises.

The U.S. government has chosen a different route for General Motors and Chrysler, extending $17.4 billion in temporary assistance, or bridge loans. Washington hopes to coax agreements needed to restructure the companies.

While the aim of buffering the U.S. economy from auto-maker bankruptcies may be laudable, it could prove tough to achieve.

General Motors Corp. CEO Rick Wagoner smiles during a news conference at the company

One potential stumbling block: getting bondholders to convert two-thirds of their debt to new equity, as called for under the aid plan. Such concessions are standard in bankruptcy, but outside court they can't be unilaterally imposed.

So some bondholders may hold out for better terms. Others might refuse altogether because they feel bankruptcy is inevitable, meaning any new stock will prove worthless. United Auto Workers protests of concessions being asked of them may only underscore to bondholders that they too should balk.

A GM spokeswoman said the company recognizes that bondholder concerns will be an issue. But since "the goal is for a stronger, more viable company," many bondholders are likely to agree, she added.

Holdouts may be subordinated by new bonds issued under a debt-for-equity swap. Yet some could decide this isn't such a risk, since their claims will remain whole and the company may be on a sounder footing.

There is an added wrinkle. A clause in indentures to some GM bonds mandates that, under certain conditions, liens on domestic manufacturing assets given as part of new debt issues require that existing bondholders receive similar security. This could potentially turn unsecured bondholders into secured lenders, giving them less incentive to take a haircut. How that will play out is unknown.

What is clear is that the loans are no guarantee these companies will survive. The assistance may end up being a bridge to nowhere.