Why a GM Bankruptcy Filing Might Not Be a Bad Thing

With General Motors' long-anticipated day of reckoning a little more than a week away, nearly all signs are pointing to the wounded auto giant limping its way into bankruptcy court, but experts say that might not be as bad as once expected.

Car and truck buyers, they say, may not be as fearful of Chapter 11 as once thought, as evidenced by Chrysler's stronger-than-expected sales in the two weeks after it took the dreaded step into court.

Empty GM Dealership

"I think in this case and in the eyes of the consumer, uncertainty is the enemy," said Jeff Schuster, executive director of automotive forecasting for J.D. Power and Associates. "Once they know what happened, it at least is better than uncertainty."

GM borrowed an additional $4 billion from the government Friday on top of $15.4 billion it previously received.  It faces a June 1 government-imposed deadline to finish restructuring or be forced into bankruptcy court.

In a TV interview broadcast Saturday, President Obama said he hoped both GM and Chrysler emerge from their restructuring as "leaner, meaner" companies that are more competitive. He made no mention of a possible GM bankruptcy filing, however.

Restructuring demands on GM include cutting labor costs, reducing debt, shedding dealerships and brands, and closing excess factories.

The company this week reached cost-cutting deals with Canadian and U.S. unions that still have to be ratified by members, but GM's unsecured bondholders have resisted an offer to take a 10 percent stake in the company to wipe out $27 billion in debt.

They say that's too small a stake for the amount they are owed.

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But even if GM files for Chapter 11, Chrysler's performance since its April 30 bankruptcy filing has made analysts optimistic that GM sales won't "fall off a cliff" as the company's CEO predicted in February.

Chrysler's sales to individual buyers are down 40 percent so far this month when compared with May of last year, a little worse than the overall market, which is down around 35 percent, the company has said.

Schuster said that's better than he expected, and he predicted that GM might fare even better if it goes into Chapter 11.

"Maybe optimistic is a little too strong, but I think there could be potential for, once it's announced and once we understand how it's going to work, the potential for an uptick in the second half of the year," he said.

Chrysler is keeping its retail sales up to a large degree by offering rebates and other incentives.

The company led major automakers in April with an average of $4,383 per vehicle, up from $3,795 in the same month last year, according to the Edmunds.com automotive Web site. GM was second with $4,107.

With the government announcing that it would back GM and Chrysler warranties, people are taking advantage of deals to get cars on the cheap, said David Koehler, a clinical marketing professor at the University of Illinois at Chicago.

"I think consumers right now know cars last for a long time," he said. "What they're looking at is the deals. I don't anticipate the doom and gloom that GM said, that this was going to kill them."

GM's tentative labor deals have raised the pressure on bondholders to accept the debt exchange offer, which may keep the company out of bankruptcy.

The offer expires on Tuesday, but GM said in a regulatory filing that it would decide Wednesday if it will be extended.

Under GM's new capital structure, the government would forgive about $10 billion of its loans and get 50 percent of the company, and the United Auto Workers would own 39 percent for cutting in half the $20 billion GM owes to a union-run retiree health care trust.

Given that, bankruptcy experts say it's unlikely that GM can round up enough bondholders to get the debt-reduction to go through.

The Treasury Department, which is overseeing GM's government-funded restructuring, has required 90 percent participation, but a committee of some of GM's largest bondholders have said they won't take the offer.

"The other bondholders are getting such a poor deal, there's just no way I can see them bringing those bondholders on board by June 1," said Jon Groetzinger, a visiting law professor at Case Western Reserve University in Cleveland.

Rep. Jeb Hensarling, R-Texas, and 22 House Republicans wrote Treasury Secretary Timothy Geithner on Friday to seek fairness for GM's debt holders.

"The proposal seems to favor the rights and claims of the UAW, a political ally of the current administration and a powerful lobbying force in Washington, over the rights and claims of the company's diverse group of bondholders," Hensarling and the lawmakers wrote.

A spokesman for the bondholders committee declined to comment Friday.

Also in doubt is GM's plan to cut its network of about 6,000 dealers by 40 percent before the end of 2010.

GM sent notices last week to 1,100 dealers telling them their franchise agreements won't be renewed when they expire next year, and many dealers plan to fight in court.

State franchise laws generally protect dealers, so it's unlikely GM could accomplish the cuts without help from a bankruptcy judge, experts have said.

Fear of bankruptcy and the possibility that it could come as early as next week drove GM shares down 49 cents, or 26 percent, to $1.43 Friday, erasing much of the 32 percent gain from Thursday when the UAW agreement was announced.

As June 1 fast approaches, there's still an outside chance that GM could somehow pull it all together and complete restructuring out of bankruptcy court, said John Pottow, a University of Michigan professor who specializes in bankruptcy.

Since the unions have given concessions and settled, there is pressure on GM's bondholders to do the same or risk becoming the entity that drove GM into bankruptcy, he said.

"When they make those concessions, it becomes tougher for you not to make those concessions as well because everyone's doing it," Pottow said, adding that dissident Chrysler creditors gave up their fight as pressure mounted and other stakeholders fell in line.

But with thousands of bondholders, it will difficult to get 90 percent of them to agree.

"There's no sort of like central negotiating committee of bondholders and unsecured creditors," he said.

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