GM Said to Gain Consumer Trust From Chrysler’s Quick Bankruptcy

GM Said to Gain Consumer Trust From Chrysler’s Quick Bankruptcy


May 27 (Bloomberg) -- Chrysler LLC’s swift bankruptcy process will give consumers confidence that General Motors Corp. would also emerge quickly if it needs to seek court protection, a person familiar with the matter said.

A restructured Chrysler is almost ready to emerge from bankruptcy and will do so closer to 30 days after its April 30 filing rather than the upper limit of 60 days previously estimated, said the person, who asked not to be identified discussing the government’s talks with automakers. That would mean Chrysler may leave court protection as early as next week.

Chrysler’s May sales were similar to those in April, showing consumers have taken President Barack Obama at his word that he intends for a retooled company to survive, the person said. That leaves consumers feeling more optimistic that if GM goes through a similar process, warranties and service will be provided, the person said yesterday.

GM faces a June 1 deadline to achieve a swap of bondholder debt for equity and to win concessions from the United Auto Workers, or file for bankruptcy as Chrysler did. The person declined to speculate as to whether GM would need to file for bankruptcy, an outcome the automaker has called “probable.”

“The government has showed that it’s going to put its muscle behind this,” said George Magliano, director of automotive research for IHS Global Insight Inc. in New York in a Bloomberg Television interview yesterday. “They don’t want a long bankruptcy. They want to get it in, get it out to minimize the impact of a long bankruptcy.”

U.S. Ownership

GM’s equity would be majority owned by the U.S. Treasury once the automaker’s restructuring plan is in place, said the person familiar with the discussions, who wouldn’t estimate the government’s ownership percentage in the Detroit-based company. The Canadian government also would have an equity stake, the person said.

The U.S. and Canadian governments may have equity ownership of as much as 69 percent. GM has proposed giving bondholders a 10 percent equity stake in the reorganized company and current shareholders 1 percent. The company also has agreed to provide as much as 20 percent of shares to a health-care trust fund for union retirees.

U.S. ownership would be for the shortest period of time possible and, as a stockholder, the government would participate as minimally as would be responsible, the person said. No government employees will serve on GM’s board.

CEO Forced Out

Former GM Chief Executive Officer Rick Wagoner had said that bankruptcy should be avoided. GM, in its Feb. 18 restructuring plan for the government, cited a study saying 80 percent of consumers wouldn’t buy a car from a bankrupt company.

Wagoner said as recently as March 17 that a bankruptcy “might not work.” He was forced out by the Obama administration later that month.

A possible bankruptcy at GM, should one become necessary, will be a bit longer than that of Auburn Hills, Michigan-based Chrysler because of GM’s complexity, the person said. Obama hasn’t yet made a decision on how much debtor-in-possession financing GM would get in bankruptcy, and the government will provide adequate working capital during any Chapter 11 reorganization, the person said.

The possibility of a GM bankruptcy has become greater over time, the person said, while declining to speculate on whether or where a filing may occur. GM’s bankruptcy would be longer than Chrysler’s because it is a bigger company with international operations and with publicly held equity and debt, the person said.

More Equity

GM tapped $4 billion more in U.S. aid last week to push its total to $19.4 billion. GM also won a union agreement to cut the payment of stock to the United Auto Workers health-care trust by 55 percent, giving the biggest U.S. automaker more equity to spread among creditors, including the government.

The health trust fund will receive 17.5 percent of the shares in a reorganized GM, along with $6.5 billion in preferred stock that pays a 9 percent dividend and a $2.5 billion note to be repaid in installments until 2017, according to a UAW document obtained by Bloomberg.

The fund also would get 2.5 percent of GM’s stock should shares reach $75, according to the UAW document.

GM’s new stock contribution shrinks its earlier plan to send as much as 39 percent of the equity to the fund to cover retirees’ medical bills. GM wants to issue 60 billion shares to pay the UAW, the government and bondholders in exchange for reducing debt.

GM’s offer to swap its $27 billion in debt for a 10 percent equity stake by bondholders expired yesterday at 11:59 p.m. in New York. An ad hoc committee of institutional GM bondholders called GM’s April 27 offer “neither reasonable nor adequate.”

BLOOMBERG