Blog: GM Ch11 - the odds are shortening
Dave Leggett | 11 May 2009
I guess it's looking increasingly likely that GM is heading for a 'quick rinse' in Chapter 11. In fact, 'increasingly likely' doesn't quite cover it. It's probably close to being inevitable at the beginning of next month, even if GM's management has a public position to maintain. Last week's GM financials were pretty bad (losing $6bn in a single quarter is going some), but that in itself isn't a deciding factor.
The problem for GM is in the increasingly messy mechanics of restructuring outside of Chapter 11. 'Debt for equity' isn't sounding too good to bondholders because there isn't much equity left after the government and UAW stakes are accounted for. It's looking like there will be quite a few 'holdouts' and that agreement will be difficult to secure by June 1.
The GM dealer network – considered by many to be bloated - might be much more easily rationalised with GM inside Chapter 11 rather than outside it. And further cost-cuts and plant closures might also be secured via bankruptcy court rather than difficult to extract UAW/CAW concessions.
As for the view that consumers will be put off from buying cars off a company that is bankrupt, the bad publicity thus far and attendant use of the b-word has probably already wrought much of that effect (GM's US sales are tanking by more than the overall market). Obama on TV insisting that it will be another short and sharp period in bankruptcy might actually reassure some and at least remove some of the uncertainty (which isn't helping).
It may just be that many inside GM are now concluding that a managed bankruptcy is becoming a less bad option than trying to stay out. GM has even moved some suppliers' payments due on June 2 forward to May 28. That will help suppliers if GM files on June 1.
But make no mistake, GM in Chapter 11 will be a much bigger deal than Chrysler. There will be a wider fallout. It will dent stock markets globally and cause the fragile confidence that the world economic outlook is actually getting slightly better to be questioned. American industry will be facing a huge wake-up call that even a still fairly new man in the White House will struggle to put a positive gloss on.
I expect CEO Fritz Henderson will have one last shot at putting the pressure on everyone to sign up to a deal and restructuring plan that keeps GM outside of bankruptcy (he's called a press conference for later today). However, he'll be making it very clear that planning for that eventuality is now in earnest. And I don't think he'll be bluffing.
It’s a bit like one of those teenage parties when the breathing is getting dangerously heavy and someone switches the lights out....
I'm starting to get a small idea of the scale of things here in China, but really, I'm only scratching the surface of this vast country....