Even as General Motors (GM) fights tooth and nail to stave off a Chapter 11 filing, it’s apparent the giant auto maker would have the luxury of entering bankruptcy proceedings with several significant advantages, not the least of which is the backing of Uncle Sam.
GM has yet to file for Chapter 11, but the writing may be on the wall. The auto maker has reportedly sped up preparations for a bankruptcy filing, given that the government threatened to cut off funding due to struggles to restructure out of court.
If GM is able to successfully emerge from bankruptcy proceedings, the auto maker would follow in a line of now-viable companies like Delta Air Lines (DAL), Macy’s (M) and Calpine (CPN) that were the products of Chapter 11 filings.
“Chapter 11 in my mind is a very valuable tool for corporate restructuring in America and needs to be recognized as such by the business community. In the last few years there has been a more limited use and more of a fear of filing than there had been in the past,” said Dave Heiman, a bankruptcy partner at Jones Day, which Chrysler LLC has retained as its bankruptcy counsel. Heiman declined to comment on the auto makers specifically.
Due to its unique circumstances, GM has a chance to enter bankruptcy with a badly needed head start.
‘Ultimate Credit Enhancer’
It's widely assumed that the U.S., which has loaned GM $17.4 billion, will provide the company with debtor-in-possession financing, giving the company the luxury of avoiding the dried up markets for DIP altogether.
“That is a huge advantage. I can’t think of any other debtor in the last 27 years that’s had that sort of backing. It’s the ultimate credit enhancer,” said Thomas Salerno, co-chair of international restructuring at Squire, Sanders & Dempsey. “Let’s face it, if the government can’t make good on this, the world has a whole other set of problems” that are worse than a failed auto maker.
It’s a good thing the U.S. has its back as GM would likely be unable to receive DIP funding due to its long stream of red ink.
Warranting Concern
GM originally insisted a bankruptcy filing wasn’t in the cards because customers would never buy cars if they weren’t assured the company’s warranties and service would be around tomorrow.
Even Douglas Baird, a law professor at the University of Chicago who opposed the auto bailouts, agrees this presents an issue.
“We haven’t had a large manufacturer of durable consumer goods go through bankruptcy. It creates a problem with respect to warranties,” said Baird.
The U.S. quickly solved that problem by backing all GM warranties last month.
“Very few companies have the benefit of the full faith of the government behind them,” said Salerno.
What Stigma?
Bankruptcy experts also said the stigma of a bankruptcy filing has been lessened as the recession has forced scores of companies and thousands of Americans to do the same.
“In some respects there is plausible deniability because everyone is in trouble. It’s almost the norm,” said Salerno.
Angela Somers, a bankruptcy attorney and senior counsel at law firm Allen & Overy, echoed that sentiment.
Actually, it might be safer buying from a Chapter 11 company than from one which has tried to avoid filing but whose problems are mounting.”
Gift-Wrapped Chapter 11
Unlike many companies that start from scratch when they enter bankruptcy proceedings, it’s also assumed that GM would have the advantage of a prepackaged bankruptcy. This type of filing is often cheaper, quicker and less risky as the major parties negotiate the general terms of bankruptcy ahead of time.
“It gives the case direction or the illusion of direction. Either can be helpful,” said Somers.
Lessons Learned?
To be sure, few are saying that even these distinct advantages will make a bankruptcy filing pain-free for GM. Even in a best-case scenario, a GM bankruptcy would likely lead to many more layoffs and the scuttling of well-known brands. And the process could drag out for years and fail to produce a viable GM if the auto maker fails to heed the lessons of previous cases.
“The biggest mistake people make is they don’t do enough,” said Baird. “You have too many firms that restructure and don’t bite the bullet. They don’t make all the hard changes they need to make.”
It’s also important to remember that Chapter 11 isn’t a cure-all and cannot fix a broken business model.
“Bankruptcy can clean up your balance sheet but [as a restaurant owner] if your balance sheet is bad because your food is bad, bankruptcy can’t help you,” Baird said.
In an attempt to address that issue, GM is reportedly considering using the process to split into a “New GM” that would contain desirable brands such as Chevrolet and Cadillac and an “Old GM” holding less-profitable Saturn and the company’s massive health-care liabilities.
Regrettably for GM, it may be too late for the auto maker to learn from one the biggest lessons of failed Chapter 11 filings of the past.
“Don’t’ be too afraid of filing. They have already unfortunately failed on that lesson,” said Somers.
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