Megan McArdle writes on what could be expected to happen in a GM or Chrysler bankruptcy:
“a bankruptcy judge, who will, among other things, void the company’s contracts with the unions and start over from a baseline of zero. Since this is exactly what the $18 billion was supposed to prevent, it’s hard to see… [the government] turning around and making it happen themselves.
Bloomberg reports that in order to be paid back its bailout loans, the US government may force GM and Chrysler into bankruptcy court. As the loans currently stand, the taxpayer money is last to be paid back after billions in debts the companies owe to Citigroup, JPMorganChase and Goldman Sachs. Looking to nudge taxpayers to the front of the line for payment, the Treasury Department has hired a group of law firms to examine the situation: Cadwalader, Wickersham & Taft LLP and Sonnenschein, Nath & Rosenthal, both from Chicago, and Rothschild Inc., an investment bank.
As a condition of the bailout funds, if the federal government cannot come to terms with GM and Chrysler’s other creditors about heading to the front of the pack, the government can send the companies into bankruptcy as a condition for further loans and go to the front through converting the bailout funds to “debtor in possession” (DIP) loans to the car companies, which are dealt with first in bankruptcy proceedings.
The automakers have rejected any calls for bankruptcy, saying the process would lead to liquidation after scaring off further creditors. Both are attempting to pare down debt in anticipation of a February 17th deadline for presenting plans on how they can repay the government loans.
GM is renegotiating $27.5 billion in debt in an attempt to get it down to $9.2 billion in exchange for equity to debtors. Chrysler owes $7 billion to Goldman Sachs, JPMorganChase and Citigroup and another $2 billion to Cerberus Capital Management and Daimler, which own 80% and 20% of Chrysler’s shares respectively. GM is on the hook to JPMorgan and Citigroup for $6 billion in loans.
Lawmakers discussing the bailout had pointed out that taxpayer money should not be lost if the companies failed.
Yahoo lists Chrysler as one of the companies that could shut down due to ripples from the global economic crisis, as Circuit City and Linens ‘N’ Things already have.
According to numbers from Moody’s Investors Service, bond defaults could lead to “25 significant bankruptcies per month.”
Yahoo developed a list of 15 companies it thinks may not be able to survive this year’s economic downturn, companies in areas that are affected by the crisis, have not put away much cash, and have high debt and interest payments due this year. One of them is Chrysler. Moody’s rates Chrysler and the other 14 companies as very high credit risks for lenders.
Yahoo points to Chrysler CEO Bob Nardelli’s protestations that Chrysler is in fine shape as evidence that something is awry. According to Moody’s, Chrysler has the worst prognosis of the Big Three Detroit automakers, with an automobile lineup heavy on trucks and SUVs and few small cars. Yahoo concludes, “A recent deal with Fiat seems dubious, since the Italian automaker doesn’t have to pony up any money, and Chrysler desperately needs cash. The company is quickly burning through $4 billion in government bailout money, and with car sales down 40 percent from recent peaks, Chrysler may be the weakling that can’t cut it in tough times.”
Moody’s also looks down on the prospects of Dollar Thrifty Rental Cars, which has a heavy Chrysler fleet (80%) and could be in dire straights after a Chrysler bankruptcy. Dollar relies more on leisure travelers than Avis and Hertz, which also hurts it in a bad economy where not as many people are traveling for vacations.