The US government may force General Motors and Chrysler into bankruptcy to assure repayment of US$17.4bn in federal bailout loans, a report said on Monday, adding that automakers claim such action would destroy them.
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US taxpayers currently take a backseat to prior creditors, including Citigroup, JPMorgan Chase & Co and Goldman Sachs Group, according to loan agreements posted on the US treasury’s website cited by Bloomberg News. Two people involved in the work last week told the news agency the government had asked a law firm to help establish place it at the front of the queue for repayment.
If federal officials fail to get a consensual agreement to change their position regarding repayment, they have the option to force the companies into bankruptcy as a condition of more bailout aid, Bloomberg said. Baker & Hostetler partner Don Workman said the government would finance the bankruptcy with a so-called “debtor in possession” or DIP loan, a lender status that gives the US priority over other creditors.
“They are negotiating to see if they can reach an agreement,” Washington-based bankruptcy lawyer Workman was quoted as saying. “If not, they are saying ‘We are pretty darn sure that a bankruptcy judge will allow us’” to be first in line for repayment.
Automakers have dismissed calls to reorganise under bankruptcy protection, saying a Chapter 11 restructuring would scare away buyers [worried about such things as warranty, parts and service backup should an automaker disappear, as did Rover here in the UK in 2005] and lead to liquidation.
They are working toward a 17 February deadline to show progress on plans put in place as part of the US loans received in December from the federal Troubled Asset Relief Programme, Bloomberg said. The companies must reduce labour costs and show how they will repay the money by next month.
The report noted that GM and Chrysler are already trying to restructure out of court by cutting labour costs, reducing debt levels and eliminating dealers, while GM reportedly is in talks to trim $27.5bn in unsecured debt to about $9.2bn in a swap for equity.
The company has said it plans to close dealers and reduce obligations to a union retiree health fund by half to $10.2bn in a separate equity swap. Chrysler CEO Robert Nardelli also has said his company will try to cut debt.
According to Bloomberg News, the US government has an option to work out an inter-creditor agreement outside of bankruptcy that would give it rights to some collateral ahead of others.
