Sunday, May 31, 2009

GM to file for Chapter 11 protection

By Tom Braithwaite in Washington, Bernard Simon in Toronto, John Reed in London, Bertrand Benoit in Berlin and Julie MacIntosh in New York

Published: May 31 2009 23:29 Financial Times

General Motors will file for Chapter 11 protection on Monday in the biggest ever bankruptcy of an industrial company, tapping an additional $30bn in government financing and sparking a probable legal battle between the carmaker’s stakeholders.

President Barack Obama and Fritz Henderson, GM’s chief executive, will speak after the filing in New York, seeking to reassure workers, suppliers, dealers and car buyers that a reinvigorated GM can emerge from a court-supervised restructuring within 60-90 days.

GM will close 11 plants and idle three more as part of a “shared sacrifice” to rescue the failing company, US government officials said on Sunday evening. “Today will rank as another historic day for the company – the end of an old General Motors, and the beginning of a new one,” the White House said in a statement.

The carmaker employs 230,000 people globally, building more than 20,000 vehicles a day. More than 1m Americans depend on it for healthcare and retirement benefits.

The rapid restructuring of Chrysler, which is expected to exit bankruptcy within days, has increased hopes for a quick resolution of GM, but the 90-day timetable is still seen as ambitious given the potential for a serious legal challenge from disgruntled creditors.

On Saturday, Germany approved a last-minute deal to keep Opel, GM’s European arm that includes Vauxhall, afloat, agreeing €1.5bn (£1.3bn) of bridge financing while the US group negotiates a stake sale to Magna International, the Canadian auto group, and Sberbank, a Russian bank.

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Berlin also pledged to give Opel €4.5bn of credit guarantees once the sale is completed.

Berlin also pledged to give Magna €4.5bn of credit guarantees once the sale was completed.

Angela Merkel, German chancellor, discussed the agreement with Mr Obama before the announcement.

The bail-out of Opel has opened a deep rift in Germany’s government after Karl-Theodor zu Guttenberg, economics minister, said Berlin had yielded to “extortion” in keeping GM’s European operation afloat. On Saturday, he said: “I could not support the Magna concept and I always favoured an insolvency as a new beginning for Opel.”

The dispute has the potential to become explosive ahead of September’s election as it increases tensions between the free-marketeers in Ms Merkel’s camp and advocates of enhanced state intervention among her Social Democratic partners and others.

Lord Mandelson, the UK business secretary, on Sunday said he had received a “firm” commitment that Vauxhall production would continue in the UK, but added that he did not know whether any of the 5,500 jobs would be at risk.

GM on Saturday evening secured a debt-for-equity agreement from holders of 54 per cent of its $27bn (£16.7bn) bonds, boosting hopes of a speedy journey through court. Judges tend to look more favourably on plans that have broad approval from creditors. The government-brokered deal gives bondholders a 10 per cent equity stake in the restructured GM, with warrants for another 15 per cent.

The US and Canadian governments would initially own 72.5 per cent of the new GM, with the remaining 17.5 per cent held by a United Auto Workers union healthcare fund. The interests of existing shareholders would be wiped out.

However, that agreement is likely to draw strong objections from GM’s dealers and other creditors, who will argue that the plan is illegal, according to one person close to the matter.

Opponents to the plan are likely to argue that because the bondholders are not contributing anything to the “new” GM, they should not be awarded stock in the new company as part of a sale process.

A bankruptcy judge can rule that a company’s bankruptcy plan is illegal if it is actually just a reorganisation plan disguised as a sale process. In such cases, a judge may rule that certain creditors are being inappropriately awarded stakes in the new company.

Secured creditors will get a full recovery, in contrast to the situation at Chrysler where the government’s demand that banks and hedge funds took a severe haircut on the debt led to an acrimonious battle of words. An government official said the difference was the level of security, with GM’s senior creditors “amply secured”.

The US government will provide an additional $30.1bn in financing to get the company through bankruptcy and would take a 60 per cent stake and $8.8bn in debt and preferred stock in the new company.

“We intend for this to be a permanent resolution to the GM situation,” said a senior official from the Obama administration, adding that there should be no further taxpayer support.

Government officials stressed on Sunday night that they did not intend to interfere in the day-to-day operations of GM and would behave as an ordinary shareholder before selling the stake as soon as practical. “We did not seek or desire to have this equity position,” said one official.

The Canadian and Ontario governments — where some GM plants are located — will lend $9.5bn to the carmaker in exchange for $1.7bn in debt and preferred stock and 12 per cent of the equity.

GM will say that it aims to emerge from Chapter 11 shorn of much of its debt, four of its eight brands, and surplus plants and dealers. The new company would achieve break-even at 10m annual car sales compared with about 16m today.

A decline in car sales linked to the global economic downturn, together with several years of higher fuel prices and huge liabilities to workers’ healthcare and benefits had driven the company to the brink of failure before the intervention of the Bush administration last year and additional taxpayer support under the current Obama administration.

Al Koch, a managing director at AlixPartners, the restructuring specialist, will manage the process for GM, according to a person familiar with the matter.

GM is also likely to announce within the next day or two the long-awaited sale of Hummer, the large sport-utility vehicle that became an emblem of GM’s missteps.

Additional reporting by Nicole Bullock in New York

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