Debt Exchange Falls Short; G.M. Moves to Sell Units

Bondholders at General Motors on Wednesday rejected an offer to exchange $27 billion in debt for a small amount of stock, as G.M. prepared for a bankruptcy filing that could come as soon as this weekend.

In Europe, the company moved to combine its main operations under the umbrella of Adam Opel, its German business, to simplify the sale of the unit.

In a statement about the bondholders, G.M. did not give vote totals for the tender offer, which began on April 27 and expired at 12:01 a.m. Wednesday. G.M. had required 90 percent of bondholders to agree to exchange their debt, said said Wednesday morning that the notes tendered were “substantially less than the amount required.”

Without approval, G.M. had said it would seek bankruptcy protection. But it made no announcement of its plans. The company said it had withdrawn its offer, and that its board would meet to decide further steps.

The company is expected to spend the next few days finishing its bankruptcy case. One important element before it files is securing the approval by the United Automobile Workers union of a new set of concessions.

Workers are voting on the proposal in meetings on Wednesday. It would form the basis of a labor contract between the union and the new version of G.M. that is expected to emerge from bankruptcy protection.

In Europe, the combination of G.M.’s businesses, which is contingent on Berlin’s approval, would help to “ring fence” the assets from a bankruptcy filing of the parent company, and would make German government and General Motors equal partners, a G.M. spokeswoman in Zurich, Karin Kirchner, said.

“The intention is to pool the Opel and Vauxhall assets under the Adam Opel unit,” Ms. Kirchner said. “We’re doing this in preparation for a trustee model that has been proposed by the German government.”The simplified structure could ease the way to the next step, which is expected to be a sale of Opel to either Fiat, the Italian carmaker, or Magna International, the Canadian auto parts maker, which is backed by the Russian lender Sberbank. The winning bidder will most likely be announced later Wednesday, the German finance minister Peer Steinbrück told journalists in Berlin.

Chancellor Angela Merkel and other top German politicians, including governors from states with Opel plants, were to meet with Fiat and Magna executives, as well as representatives of G.M. and the United States government.

Mr. Steinbrück said the interest expressed by a Chinese company, widely reported to be Beijing Automotive, might have come too late. Beijing Automotive officials could not be reached for comment and G.M. and the German government declined to further identify the Chinese bidder.

RHJ International, a Belgian-listed investment company, has also proffered a bid, but German officials have signaled that the Magna or Fiat bids were considered the most serious.

“The chancellor has to examine the offer by Magna very closely because in my opinion, as far as I’m informed, it’s the most realistic, the best offer,” said Peter Struck, the parliamentary leader of the Social Democrats, who, with the Christian Democratic Union of Merkel, form the governing coalition.

German state and federal governments have put together a loan guarantee package of 1.5 billion euros, or $2.1 billion, to pave the way for a deal for Opel.

As skepticism about Fiat’s offer has spread, Magna executives have mounted a campaign to assuage German officials in matters where its own offer had ruffled feathers.

For example, Magna’s bid initially foresaw the elimination of 2,200 jobs in Bochum, in northwestern Germany, a step that drew the ire of Juergen Ruettgers, the governor of North Rhine-Westphalia, where Bochum is located. Magna wants to cut 2,600 jobs in Germany overall.

Magna has since floated the idea of moving production of the Opel Astra, a line of small family sedans, from Antwerp, Belgium, to Bochum, allowing it to keep more positions there.

German officials said that Fiat stuck to its plans to keep Opel’s three assembly plants, but close the engine plant in Kaiserslautern.

The Magna offer would put 35 percent of Opel in the hands of Sberbank, a Russian bank, and include cooperation with GAZ, a Russian automaker. Oleg Deripaska, an ally of Prime Minister Vladimir V. Putin, is the controlling shareholder in GAZ.


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Rescue Plan Would Give U.S. Most of GM’s Stock

Some Bankruptcies Are Worth It

THE Treasury Department hopes that its recent stress tests on the country’s 19 largest banks have weeded out the capital-challenged ones. But many other large financial institutions are still groaning under huge burdens of debt and assets of dubious or uncertain value.

Since the collapse of Bear Stearns just over a year ago, the government has bailed out financial institutions whose failures threatened the broader financial system (with the exception of Lehman Brothers). In explaining this approach, federal regulators have said that they lack the tools to prevent disorderly failures of such institutions. Bailouts have been the only alternative to bankruptcy filings that can have dangerous effects on the rest of the economy.

But why not adopt an approach that would, where necessary, allow the controlled failure of a major financial institution?

To limit the disruption such an event might cause in the broader market, the government could announce that it would support the institution — for example, by guaranteeing its trading obligations — for, say, 60 to 90 days. During this period, the institution’s creditors and counterparties would not be permitted to cancel their contracts and demand immediate repayment, or force the institution to pony up additional collateral. (In the case of commercial banks, there would need to be arrangements to ensure that customers had continued access to their deposits.)

In return, the institution requesting government assistance would be required to ask its creditors and counterparties to reduce or defer their claims in order to restore the institution to solvency. It would also be required to commence plans for a possible bankruptcy at the end of the support period; make all material information about itself available to prospective buyers; and cooperate with counterparties that wish to enter into arrangements among themselves that would smooth an eventual bankruptcy, if one cannot be avoided.

If at the end of the support period enough creditors and counterparties have agreed to reduce or defer their claims so that the institution can stay afloat, or a third party has agreed to acquire it, then it would resume normal business.

If neither of these happy outcomes occurs, then the institution would enter bankruptcy (or, in the case of commercial banks, insolvency) in the usual way. By this point, however, there would have been enough time to make preparations to ensure that the institution’s failure would not destabilize other companies or disrupt the financial markets generally.

Of course, the prospect of an insolvency proceeding at the end of the support period, with no hope of further government help, ought to concentrate the minds of the stakeholders on finding a better solution.

Lee C. Buchheit is a lawyer in New York City. David A. Skeel Jr. is a law professor at the University of Pennsylvania.


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Road Hazards Ahead

President Obama may call them ‘speculators,’ but the economy needs private investors.

DESPITE a massive infusion of government cash, General Motors is slowly and almost assuredly limping toward bankruptcy. The company’s stock has been hovering just above the $1 mark for the past few days, and chief executive Fritz Henderson has signaled that bankruptcy court may be the best — or perhaps only — venue in which the company can come to terms with its creditors. GM — and its partner, the U.S. government, which could get as much as a 50 percent equity stake in the company — have set themselves a deadline at the end of this month to decide what to do.

And therein lies the potential danger. The government’s intervention in GM’s financial affairs tilts the scales so dramatically in the company’s (read: government’s) favor that it risks shutting out the legitimate interests of some creditors in favor of politically connected players who are owed much less and have less of a claim to the company’s money. GM bondholders, for example, are being pushed to accept a 10 percent equity stake in repayment of their $27 billion in loans to the company. The United Auto Workers, on the other hand, is being offered a 35 percent equity stake in exchange for its claim of roughly $10 billion — a claim that would typically be wiped out in bankruptcy. It is hard to blame bondholders for refusing to cave in to the government’s pressure, especially because some of them bought insurance against a possible GM bankruptcy; that insurance would pay them more than $2 billion in cold, hard cash — instead of in potentially worthless stock should the company file for Chapter 11 protection.

There is reason for GM creditors to be uneasy, especially after the government’s hardball tactics in the recent Chrysler bankruptcy. In that case, hedge fund investors who refused to accept the government’s low-ball offers were demeaned by the president as “speculators” and all but blamed for driving the automaker into insolvency. Once in bankruptcy court, these creditors fared no better, in large part because the government’s decision to provide operating funds for Chrysler gives it an outsized power to shape the reorganization. While the hedge funds are likely to receive less than 30 cents on the dollar, a health-care fund controlled by the UAW is being handed a 55 percent ownership stake in Chrysler. If bankruptcy rules had been strictly followed, the union would have been entitled to little, if any, return.

Extraordinary times call for extraordinary measures, and it was with this thought in mind that we endorsed the federal government’s decision to pump billions of dollars into the automakers. But the spectacle of creditors being stripped of their legal rights in favor of a labor union with which the president is politically aligned does little to attract private capital at a time when the government and many companies need these investors the most. Investors’ fears will only be compounded if the administration follows a similar blueprint with GM.

Editorial, Washington Post


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Chrysler and the Rule of Law

The Founders put the contracts clause in the Constitution for a reason.

The rule of law, not of men — an ideal tracing back to the ancient Greeks and well-known to our Founding Fathers — is the animating principle of the American experiment. While the rest of the world in 1787 was governed by the whims of kings and dukes, the U.S. Constitution was established to circumscribe arbitrary government power. It would do so by establishing clear rules, equally applied to the powerful and the weak.

Fleecing lenders to pay off politically powerful interests, or governmental threats to reputation and business from a failure to toe a political line? We might expect this behavior from a Hugo Chávez. But it would never happen here, right?

Until Chrysler.

The close relationship between the rule of law and the enforceability of contracts, especially credit contracts, was well understood by the Framers of the U.S. Constitution. A primary reason they wanted it was the desire to escape the economic chaos spawned by debtor-friendly state laws during the period of the Articles of Confederation. Hence the Contracts Clause of Article V of the Constitution, which prohibited states from interfering with the obligation to pay debts. Hence also the Bankruptcy Clause of Article I, Section 8, which delegated to the federal government the sole authority to enact “uniform laws on the subject of bankruptcies.”

The Obama administration’s behavior in the Chrysler bankruptcy is a profound challenge to the rule of law. Secured creditors — entitled to first priority payment under the “absolute priority rule” — have been browbeaten by an American president into accepting only 30 cents on the dollar of their claims. Meanwhile, the United Auto Workers union, holding junior creditor claims, will get about 50 cents on the dollar.

The absolute priority rule is a linchpin of bankruptcy law. By preserving the substantive property and contract rights of creditors, it ensures that bankruptcy is used primarily as a procedural mechanism for the efficient resolution of financial distress. Chapter 11 promotes economic efficiency by reorganizing viable but financially distressed firms, i.e., firms that are worth more alive than dead.

Violating absolute priority undermines this commitment by introducing questions of redistribution into the process. It enables the rights of senior creditors to be plundered in order to benefit the rights of junior creditors.

The U.S. government also wants to rush through what amounts to a sham sale of all of Chrysler’s assets to Fiat. While speedy bankruptcy sales are not unheard of, they are usually reserved for situations involving a wasting or perishable asset (think of a truck of oranges) where delay might be fatal to the asset’s, or in this case the company’s, value. That’s hardly the case with Chrysler. But in a Chapter 11 reorganization, creditors have the right to vote to approve or reject the plan. The Obama administration’s asset-sale plan implements a de facto reorganization but denies to creditors the opportunity to vote on it.

By stepping over the bright line between the rule of law and the arbitrary behavior of men, President Obama may have created a thousand new failing businesses. That is, businesses that might have received financing before but that now will not, since lenders face the potential of future government confiscation. In other words, Mr. Obama may have helped save the jobs of thousands of union workers whose dues, in part, engineered his election. But what about the untold number of job losses in the future caused by trampling the sanctity of contracts today?

The value of the rule of law is not merely a matter of economic efficiency. It also provides a bulwark against arbitrary governmental action taken at the behest of politically influential interests at the expense of the politically unpopular. The government’s threats and bare-knuckle tactics set an ominous precedent for the treatment of those considered insufficiently responsive to its desires. Certainly, holdout Chrysler creditors report that they felt little confidence that the White House would stop at informal strong-arming.

Chrysler — or more accurately, its unionized workers — may be helped in the short run. But we need to ask how eager lenders will be to offer new credit to General Motors knowing that the value of their investment could be diminished or destroyed by government to enrich a politically favored union. We also need to ask how eager hedge funds will be to participate in the government’s Public-Private Investment Program to purchase banks’ troubled assets.

And what if the next time it is a politically unpopular business — such as a pharmaceutical company — that’s on the brink? Might the government force it to surrender a patent to get the White House’s agreement to get financing for the bankruptcy plan?

Mr. Zywicki is a professor of law at George Mason University and the author of a book on consumer bankruptcy and consumer lending, forthcoming from Yale University Press.


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Experts Say GM Bankruptcy Almost Inevitable

For General Motors Corp., the task at hand is so difficult that experts say a Chapter 11 bankruptcy filing is all but inevitable.

To remake itself outside of court, GM must persuade bondholders to swap $27 billion in debt for 10 percent of its risky stock. On top of that, the automaker must work out deals with its union, announce factory closures, cut or sell brands and force hundreds of dealers out of business — all in three weeks.

”I just don’t see how it’s possible, given all of the pieces,” said Stephen J. Lubben, a professor at Seton Hall University School of Law who specializes in bankruptcy.

GM, which has received $15.4 billion in federal aid, faces a June 1 government deadline to complete its restructuring plan. If it can’t finish in time, the company will follow Detroit competitor Chrysler LLC into bankruptcy protection.

Although company executives said last week they would still prefer to restructure out of court, experts say all GM is doing now is lining up majorities of stakeholders to make its court-supervised reorganization move more quickly.

”If we need to pursue bankruptcy, we will make sure that we do it in an expeditious fashion. The exact strategies I’m not getting into today, but we’ll be ready to go if that’s required,” Chief Executive Fritz Henderson said last week.

The threat of bankruptcy, however, may be just a negotiating ploy to pull reluctant bondholders into the equity swap deal. In Chrysler’s case, some secured debtholders resisted taking roughly 30 cents on the dollar for what they were owed, but most gave in after they were identified in court documents.

Henderson, who took over in March when the government ousted Rick Wagoner, said last week there’s still time to get everything done by the deadline, although he conceded it will be difficult to meet a government requirement that 90 percent of its thousands of bondholders agree to the stock swap.

The biggest obstacle to GM restructuring out of court appears to be its bondholders, who have been reluctant to sign on to the stock swap when the government and United Auto Workers union would get far more stock in exchange for debts owed by GM.

GM has proposed issuing 62 billion new shares, 100 times more than the 611 million now offered publicly.

Even though the U.S. government has agreed to back up GM and Chrysler new-car warranties, potential car buyers already view GM as if it’s in bankruptcy, reflected by the company’s steep revenue drop in the latest quarter, Lubben said. On Thursday, GM posted a $6 billion first-quarter loss and said its revenue dropped plunged by nearly half, largely because bankruptcy fears scared customers away from showrooms.

”I don’t think anyone is buying cars from a company who is wringing their hands about a potential bankruptcy for the past year or so,” he said.

Under Chapter 11, a company can stay in operation under court protection while sheds debts and unprofitable assets to emerge in a stronger financial position.

At this point, GM needs to resolve the uncertainty and get in and out of bankruptcy as quickly as possible, Lubben said.

The company is talking with the UAW and Canadian auto workers unions about concessions, including getting the UAW to take roughly 39 percent of its stock in exchange for half of the $20 billion GM must pay into a union-run trust that will take over retiree health care payments next year.

About 50 percent of the stock would go to the government for its loans. GM said last week it would need another $2.6 billion in May and $9 billion more for the rest of the year, bringing the total to $27 billion.

One percent would go to current shareholders, with bondholders getting the other 10 percent.

Bondholders are reluctant to take the deal because the government and UAW are getting far bigger stakes in the company, said Kevin Tynan, an industry analyst for Argus Research in New York.

”When you look across at what the union is getting and what the government is getting, to expect them to take 10 percent is just unrealistic,” he said.

Cutting dealers also remains a huge hurdle, with GM hoping to shed 2,600 of its 6,246 dealerships by 2010.

But dealers are protected by state franchise laws, and trying to shed them outside of bankruptcy would result in either millions of dollars in payments or multiple lengthy lawsuits, Lubben said.

”That means you’ve got to negotiate with each one of those dealers individually.”

Also, GM on Friday told its major parts suppliers that it would move up payments due on June 2 to May 28.

Company spokesman Dan Flores said it was being done to help the suppliers at a critical time, but he denied that the payments were pulled ahead of a potential June 1 bankruptcy filing.

GM has begun to temporarily close 13 assembly plants for up to 11 weeks through mid-July in an effort to control inventory. With Chrysler plants also shut down during its bankruptcy proceedings, parts suppliers will soon have no income and could go under.

It would help speed up GM’s stay in bankruptcy court if it could pull together big blocks of stakeholders to agree on reducing debt or changing other stakes, said Robert Gordon, head of the corporate restructuring and bankruptcy group at the Clark Hill PLC law firm in Detroit.

During its quest for government aid, GM executives said bankruptcy would severely cut their sales, with research showing that people would shy away from GM vehicles for fear that warranties would not be backed and parts would not be available.

Tynan said the executives now can’t change their story, even though they likely know that bankruptcy is inevitable.

”They’re sort of morally obligated to say ‘we’re intent on doing this outside of bankruptcy,”’ he said. ”But at the end of the day, they just want the magnitude of the restructuring to get done.”


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The Chrysler Bankruptcy

When President Obama outlined his plan to restructure Chrysler under bankruptcy-court protection, we shared his view that keeping a company “afloat on an endless supply of tax dollars” was no solution to the cratering of even iconic American companies.

We also admired his supreme confidence that the Chrysler bankruptcy will be a quick, official and controlled process. We just wished we were as confident as the president.

If the process is prolonged, the costs and complexity would likely ensure that the company would never emerge from bankruptcy proceedings, with dire implications for employment and economic recovery.

For the administration, the Chrysler bankruptcy filing became inevitable when a holdout group of the carmaker’s lenders rejected the government’s final offer to settle their debts, for about 33 cents on the dollar. The United Auto Workers union had already agreed to concessions to help keep the company afloat, as had large banks who hold most all of the company’s debt. Chrysler and the Italian carmaker, Fiat, had also agreed to a partnership that would enable Chrysler to tap into Fiat’s technology, designs and management.

By pushing the matter into bankruptcy court, the administration is assuming that the judge will also reject the holdouts’ demands. That would allow for a quick restructuring while keeping intact the previous agreements with the union, the big bank lenders and Fiat. In short order — 30 to 60 days by the administration’s estimate — Chrysler would emerge from bankruptcy with all the pieces in place to become in Mr. Obama’s words, “stronger” and “more competitive.”

There are reasons to hope it will work out that way. In particular, a judge may be unwilling to favor the dissident bondholders when other significant stakeholders have been able to come to agreement outside of court.

But short “prepackaged” bankruptcies generally succeed when all of the difficult issues are resolved ahead of time, requiring only a judge’s official approval. The judge in the Chrysler case may not see the remaining issues in the same cut-and-dried way that the administration does. Quickie bankruptcies like the one the administration envisions for Chrysler have also never been attempted for a company as big and multifaceted as a carmaker. If the Chrysler bankruptcy case does not proceed apace, the administration will need a new plan — and fast — to avoid pouring taxpayer money into a restructuring that may never yield the desired result.

If the bankruptcy succeeds, there is no guarantee that the Chrysler and Fiat partnership will succeed. A recent report by Fortune magazine detailed the likelihood of culture clash in a Chrysler-Fiat combination, given the companies’ complexity and different national identities. Remember the disastrous Daimler-Chrysler marriage?

It will also take some time, probably at least a couple of years, before the Chrysler and Fiat partnership yields any new cars. In the meantime, Chrysler’s own brands like Dodge and Jeep have been badly damaged by the company’s failing fortunes.

The Chrysler bankruptcy filing is a bold move for the administration, a refusal to blink when confronted with what it perceived as unreasonable demands. The object of the game — a strong and competitive Chrysler — is far from achieved.

Editorial, New York Times


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