Hurdles still await GM, Chrysler
General Motors Corp and Chrysler LLC have averted a much-feared collapse, for now.
By Agencies |
DETROIT: General Motors Corp and Chrysler LLC have averted a much-feared collapse, for now.
But the real work starts now: A wrenching restructuring that mirrors many of the steps typically undertaken in a Chapter 11 bankruptcy reorganization.
Both companies are likely to face high hurdles as the restructuring targets laid out in the $17.5 billion (11.6 billion pounds) federal rescue package for the carmakers include massive cuts in labor costs, a two-thirds reduction in debt that involves convincing creditors to swap debt for equity and possible shareholder losses.
Already many of the stakeholders, particularly the powerful United Auto Workers union and the bond holders, are balking at the concessions they would be required to make.
The UAW said it will appeal to the incoming administration of President-elect Barack Obama to reverse the steep concessions required from workers, while a group of GM bondholders has hired a law firm to negotiate with the carmaker.
GM and Chrysler have until March 31 to complete the negotiations, but winning the required cuts may prove extremely difficult outside the forceful framework of a bankruptcy court, analysts said.
On the other hand, if successful, it would help the companies reorganize without the painful stigma of a failure, they added.
"One key difference between those terms and being in bankruptcy is that consumers, who are really going to jump start this at the end of the day, would look at a company in bankruptcy quite differently," said Thomas Nishoff, co-leader of law firm Dykema's auto industry team.
"If you diminish the revenue side of the equation, at some point you can't cut costs anymore."
But the real work starts now: A wrenching restructuring that mirrors many of the steps typically undertaken in a Chapter 11 bankruptcy reorganization.
Both companies are likely to face high hurdles as the restructuring targets laid out in the $17.5 billion (11.6 billion pounds) federal rescue package for the carmakers include massive cuts in labor costs, a two-thirds reduction in debt that involves convincing creditors to swap debt for equity and possible shareholder losses.
Already many of the stakeholders, particularly the powerful United Auto Workers union and the bond holders, are balking at the concessions they would be required to make.
The UAW said it will appeal to the incoming administration of President-elect Barack Obama to reverse the steep concessions required from workers, while a group of GM bondholders has hired a law firm to negotiate with the carmaker.
GM and Chrysler have until March 31 to complete the negotiations, but winning the required cuts may prove extremely difficult outside the forceful framework of a bankruptcy court, analysts said.
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On the other hand, if successful, it would help the companies reorganize without the painful stigma of a failure, they added.
"One key difference between those terms and being in bankruptcy is that consumers, who are really going to jump start this at the end of the day, would look at a company in bankruptcy quite differently," said Thomas Nishoff, co-leader of law firm Dykema's auto industry team.
"If you diminish the revenue side of the equation, at some point you can't cut costs anymore."
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Uphill battle
A key stipulation in the aid package for the cash-strapped automakers is that the loans could be called back if they cannot meet all the conditions and prove they are viable by March 31.
While the automakers are allowed to deviate from some of the concession targets, they still must achieve long-term viability - measured as positive net present value - with or without deviations.
This highlights that the risk of a bankruptcy for either GM or Chrysler is not entirely out of the picture, JP Morgan analyst Himanshu Patel said. He added that the next administration could push for a bankruptcy at Chrysler.
GM CEO Rick Wagoner said he was confident the company could meet the conditions attached to the emergency loans and that the automaker has always had good relations with its unions. But he also acknowledged there was plenty of work to be done.
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Chrysler owner Cerberus Capital Management LP said it would contribute its equity in Chrysler automotive to labor and creditors as currency to facilitate the restructuring.As part of the rescue, GM and Chrysler are required to reduce debt by two-thirds via debt-for-equity swaps, pay half of their contributions to a retiree health care trust using stock, make UAW wages competitive with foreign automakers and eliminate the union jobs bank, which pays laid-off workers.
Underscoring the challenge facing the two companies, the UAW said just hours after the announcement of the bailout that the conditions were "unfair" and it will work with the incoming Obama administration to ensure they are removed.
Michael Haber, a partner in the bankruptcy group of law firm Smith Gambrell & Russell, says the path to achieve cost cuts from all constituents is muddled in an out-of-court restructuring.
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"Unlike a bankruptcy, where everyone understands the process and knows the rules, in this case the path forward still is unclear," he said. "The deal calls for concessions by the union, but what's the enforcement mechanism that will ensure that happens? In a bankruptcy, the court would certainly have a strong influence in its happening."Download
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