Chrysler's Bankruptcy Highlights GM's Problems

Chrysler's bankruptcy filing underscores just how difficult it would be for General Motors to complete its own restructuring deals with key stakeholders and avoid the same fate as its smaller rival.

Chrysler's failure to obtain approval from all 45 of its lending institutions to surrender nearly two-thirds of their $7 billion in Chrysler debt forced the No. 3 automaker to seek bankruptcy relief Thursday—despite successful completion of a Chrysler alliance with Fiat SpA and concessions from major unions.

Convincing thousands of GM bondholders to accept an even more sweeping debt exchange offer by a government-imposed deadline of June 1 will be just as tough -- if not impossible -- for the largest U.S. automaker, analysts said.

"Unfortunately, Chrysler bankruptcy probably illustrates the problem of getting GM bondholders to accept a lesser deal than what they think they could get in bankruptcy," said Larry Chlebina, fund manager and principal of Chlebina Capital, which owns some GM bonds.

In particular, bondholders who have insured with credit default swaps are seen likely to hold out for a potentially better recovery in any GM bankruptcy, rather than agreeing to GM's just-launched debt-for-equity offer, Chlebina said.

Under the terms of GM's proposed debt restructuring, bondholders would receive only a 10 percent equity stake in a restructured company in return for swapping out of 90 percent of the $27 billion GM debt they are owed.

Meanwhile, the U.S. government, which has provided $15.4 billion of loans to keep GM afloat since the start of the year, would own at least 50 percent of the automaker under the restructuring.

The United Auto Workers union would obtain nearly 40 percent in return for allowing GM to pay $10 billion—half of its remaining financial obligations to a UAW retiree healthcare fund—in stock, instead of cash.

"The current proposal by the government doesn't seem favorable to bondholders," said Mike Hausman, director at restructuring advisory O'Keefe & Associates.

"GM has a lot of very sophisticated bondholders and hedge funds. They're going to take a hard look at the value of recovery they could get in bankruptcy," Hausman said.

Heavy Hitters at Risk?

GM's bondholders include heavy-hitting investors like Loomis Sayles, Fidelity Investments, Franklin Templeton Investments, and Pacific Investment Management Co, as well as thousands of GM's active and retired workers.

Underscoring the depth of resistance, GM bondholders presented an alternative to GM's offer Thursday in a deal that would give them 58 percent of the new automaker, the UAW 41 percent, and the U.S. government no equity stake.

"We do not believe that nationalizing one of America's largest and most important companies is the right policy decision for our country," said Eric Siegert, financial adviser to a committee representing GM bondholders.

"Any reasonable person reviewing our plan would come to the conclusion that a completely fair and even allocation of new GM equity pro rata to the obligation that GM owes each stakeholder is the best way to resolve competing claims in an out-of-court process."

Some analysts said that GM bondholders could come under intense pressure from the government and the public to accept the offer, without which GM has said it will file for bankruptcy by June 1.

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President Barack Obama, announcing Chrysler's bankruptcy, sharply criticized a small group "speculators" among the investment firms and hedge funds whom he said held out for an "unjustified taxpayer-funded bailout" of Chrysler.

The holdouts from about 20 financial firms, holding $1 billion of Chrysler's $6.9 billion secured debt, rejected terms of the proposed debt restructuring, which had been approved by the automaker's four largest creditor banks.

The Obama administration had offered Chrysler debt holders another $250 million, for a total of $2.25 billion in cash, as late as Thursday morning if the group had agreed to the proposed restructuring of debt.

"Chrysler's bankruptcy should be a wake-up call for GM bondholders failing to align in support of GM's restructuring outside of bankruptcy," said Bill Kohler, co-chair of Butzel Long's global automotive practice.

"It should help them realize the importance of their concessions," Kohler said.

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