GM, Chrysler Face Messy Reconstruction

As Originally Posted to the Wall Street Journal

With talk of applying the nation's bankruptcy laws to General Motors Corp. and Chrysler LLC in a "surgical" way, the Obama administration has painted a picture of a smooth process that would efficiently clear away much of the auto makers' debt and other ills.

But the recent history of big bankruptcies -- including those of major airlines and auto-parts supplier Delphi Corp. -- suggests the effort will be messier than advertised, especially given the political stakes involved and the complexity of Detroit's problems.

The administration's leading plan would use bankruptcy filings to relieve the auto makers of their biggest burdens, including bond debt and retiree health-care costs, according to people familiar with the matter.

The plan would, in effect, split the assets of the two companies into "good" and "bad" components, leaving the "bad" assets and obligations of both auto makers behind in bankruptcy court.

A "good" GM and a "good" Chrysler would be created from brands and assets deemed to have more value, and proceeds from the sale of those companies would be used to pay off creditors.

The "good" GM would emerge much more quickly from court protection than the "bad" one, spending three to six months there, in a best-case scenario, said one person familiar with the plan.

But rarely has a company as big or as encumbered as GM or Chrysler entered bankruptcy proceedings or tried to navigate the process under the intense public scrutiny the two auto makers are sure to face.

GM alone has $177 billion in liabilities, including $29 billion in unsecured bond debt. Chrysler has $7 billon in secured debt. Both companies have hundreds of thousands of employees and retirees all over the country and multibillion-dollar obligations for retiree health care.

"The No. 1 risk is the parties can't agree to a consensual deal. The government takes away a lot of its leverage by admitting they won't let these companies liquidate," said Peter Kaufman, president of the investment bank Gordian Group, which advises corporate clients on restructurings.

The case of Delphi, one of the world's largest auto-parts makers, shows the obstacles and delays a company can encounter in the bankruptcy process. Delphi, a former GM unit, filed for protection from creditors under Chapter 11 of the Bankruptcy Code in October 2005, and received billions of dollars in support from GM to buy out union workers and fund pensions and retiree health costs.

Delphi originally planned to be out of bankruptcy court by early 2007. But slower-than-expected talks with its unionized labor force and the advent of the credit crisis have kept Delphi in bankruptcy for more than 800 days.

If GM and Chrysler pursue the administration's bankruptcy plan, as most of the two auto makers' insiders now expect, the process most likely wouldn't involve what is often called a prepackaged bankruptcy. In such cases, a company's creditors have already approved concessions and a plan of reorganization before the company enters bankruptcy.

Instead, the process is expected to resemble a prearranged filing, in which there is a less-formal agreement among the parties about concessions. The prearranged route is riskier because constituents can back out if they feel the company's situation or operating environment have changed radically, bankruptcy experts say. For example, if the economy worsens, sales suffer further or a key supplier collapses, bondholders or other creditors could pull out of a deal.

Another unknown is the likely reaction of the two companies' dealer networks. State franchise laws give auto dealers strong protections if auto makers breach their contracts, making it expensive to close them.

"You could also have lawsuits between shareholders who will fight over the valuations of fixed assets or intangibles. The parties have the right to be heard, to prepare experts, to do depositions, to get on the schedule. That drags things out for weeks, for months," said one person familiar with the situation at GM. "There are suppliers and dealers and other claimants we don't even know about."

If GM goes the bankruptcy route, its path may resemble that of Italian dairy giant Parmalat SpA, which entered bankruptcy in December 2003 amid an accounting scandal. The company reorganized in bankruptcy, separating bad assets, old debt and old claims from a "new" Parmalat that exited bankruptcy court in April 2005, about 15 months later.

Many of the "bad" assets were eventually liquidated, but lawsuits between the company, creditors and lenders lingered until 2007.