Even if General Motors and Chrysler obtain billions more in government loans, the threat of bankruptcy remains high for both, analysts have said.
“Despite the extension of considerable emergency funding to GM and Chrysler and their finance arms, we continue to see a high risk of a Chapter 11 [bankruptcy] filing by one or more of the US auto makers,” Agence France-Presse (AFP) quoted Bruce Clark of Moody’s Investors Service as saying.
Moody’s estimated the likelihood of an “orderly” bankruptcy protection filing backed by the government at 70%.
GM has said the cost of restructuring through bankruptcy would be US$100bn while Chrysler said it would need $24bn.
Both said the government would likely be the only source of that financing and warned that a liquidation – and the loss of up to 3m US jobs – would be the likely outcome.
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By GlobalData“The government is going to come through,” Efraim Levy, an analyst with Standard & Poor’s Equity Research, reportedly said of GM’s request for additional loans. “It’s too big to fail, especially in a fragile economy.”
But Levy warned there was “no guarantee” the massive restructuring plans would actually work, AFP noted.
The “extremely damaging” economic ripple effects resulting from a bankruptcy could actually make it more necessary in order to force “sceptical” creditors and the union to make concessions, Moody’s Clark said in a research note.
“The government may in fact have to stand aside and allow one or more companies to make a Chapter 11 filing as a measure that could accelerate the restructuring that is necessary,” he wrote.
The news agency said the US Treasury has until 31 March to decide whether to extend the loans or call them in and allow the US automakers to collapse, and there was little public support for giving any more taxpayer money to GM and Chrysler.
A poll released Wednesday by Rasmussen found that 64% of Americans opposed providing any additional taxpayer-backed loans for the embattled automakers, and 57% said the government was not likely to get the money back.
“It is clear that going forward, more will be required from everyone involved – creditors, suppliers, dealers, labour and auto executives themselves – to ensure the viability of these companies,” White House spokesman Robert Gibbs said in a statement.
There will be a great deal of brinksmanship in the coming weeks in which the government will have to threaten to abandon the automakers in order to win concessions, Edmunds.com president Jeremy Anwyl told AFP.
But there was simply no way the government – which authorised a $700bn bailout for the financial sector and a $787bn stimulus package – would allow GM or Chrysler to fail, he said.
“Twenty billion dollars here or there is really nothing compared to what’s being thrown around,” Anwyl told AFP.
“In a normal economy, sure you’d let them fail, but, in the current economy, the risk to employment, the risk to the supplier base, it’s just not worth it.”
According to Reuters, David Leiker, analyst with Robert W Baird, still sees bankruptcy as the best option for a reorganisation.
“Though likely to be painful near-term, we continue to believe that the challenges to restructuring GM and Chrysler are too complicated to be met outside of a bankruptcy,” Leiker said.
Another issue that could crop up for auto investors is the potential for “going concern opinions” from auditors due to the liquidity crunch, operational losses and solvency issues in the auto industry, according to Grant Thornton.
A going concern opinion is a statement that there is substantial doubt about the entity’s ability to continue as a going concern, something that would be typically mentioned in US Securities and Exchange Commission filings by companies, Reuters said.
“It’s important for the public, the supply base and all of the parties involved in restructuring the auto industry not to overreact if they start seeing ‘going concern’ opinions,” said Kimberly Rodriguez, co-leader of Grant Thornton’s global automotive team, adding that the radical restructurings GM and Chrysler are undertaking would ultimately help salvage the industry.