General Motors Bankruptcy is ‘Inevitable’

At the risk of bringing on more bad economic news, the experts have been saying that General Motors will probably be heading to Chapter 11 bankruptcy since the economy began to unravel last year. This comes right after competitor Chrysler LLC filed for bankruptcy protection as well. More then ever, the experts who are “in the know” are screaming it. Despite the rescue payments in late 2008 and early 2009, they claim that General Motors is just in too deep.

In order to make it through, outside of the rescue payments, General Motors will have to somehow swindle its bondholders out of $27 million of debt for 10 percent of their stock, which is arguably the riskiest it has ever been since the invention of the automobile. On top of that, they will have to work out deals with the union, who has an ironclad contract, close more factories, cut or sell brands, and force hundreds of independent GM dealers out of business.

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. Tynan also made sure to comment that he thought bankruptcy is ‘inevitable’ for the Detroit-based automaker.

The worst part about all of this is that they have to make it work in just three short weeks. They face a June 1 deadline the government set as part of the ‘bailout’ agreement. “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. Although GM intends to restructure out of court by making deals and changes, experts say they are all but in the trap now, and will soon have to restructure supervised by the courts. GM has also thrown around the idea of selling out 62 billion new stock shares, 100 times the 611 million currently on the market.

Last week, new GM CEO Fritz Henderson basically said that they will file for bankruptcy in an expeditious fashion if the need for bankruptcy presents itself. This is all assuming that the threat of bankruptcy is not a brilliant ruse to make the stock-debt swap more appealing. After all, they need a 90% bondholder agreement to make a move that was not government agreed. GM reported a $6 billion loss for the first quarter alone, as more of a reminder that bankruptcy is still in the list of top choices, and maybe the only viable option. After all, consumers have been avoiding purchasing from a corporation that has been flirting with bankruptcy for nearly a year.

At this point, GM needs to resolve the uncertainty and get in and out of bankruptcy as quickly as possible, Lubben said. Under chapter 11 bankruptcy, General Motors can continue business without interruption while restructuring under supervision of the courts. Cutting dealers also remains a huge hurdle, with GM hoping to shed 2,600 of its 6,246 dealerships by 2010. 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, according to Lubbin. GM has also begun to temporarily close 13 assembly plants for up to 11 weeks through mid-July in an effort to control inventory, ultimately controlling spending.

At the beginning of the ‘bailouts,’ this author was less than optimistic that the government, or anyone else would be able to help General Motors out of their problem because they are too deep in debt and unrealistic contracts they cannot keep. Not only is bankruptcy inevitable due to these factors, but if the economy is supposed to come back strong at all, bankruptcy is best for everyone. General Motors will renegotiate contracts, especially with the UAW, time will be allowed to strengthen assets and new automotive prototypes will be designed. When General Motors comes out of court supervision, they will be stronger than ever. How can the economy come back any stronger than that?

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