GM bankruptcy to be a tale of best of assets, worst of assets

Written by Bloomberg | Updated: May 31 2009, 05:15am hrs
When General Motors Corp files for bankruptcy protection next week, a Dickensian tale of two legal processes will unfold.

In one, a judge will be told that a new entity will emerge within three months with prized assets and a plan to revisit the best of times when GM was the worlds largest carmaker. In the other, Bleak House comes to bankruptcy court as creditors shut out of the new entity will be told to argue for perhaps years about who gets company properties the new GM doesnt want.

In the rosy scenario, the new company, armed with vehicles from GMs Cadillac, Chevrolet, Buick and GMC divisions, plans to begin making money again within 60 to 90 days, while a bankruptcy court sells or liquidates unprofitable brands such as Saturn and Hummer. Saab already is in bankruptcy.

Chrysler LLC, GMs smaller rival, is on schedule to create a similar new company even faster, stripped of billions in debt and stocked with viable vehicle models, with the approval of a bankruptcy judge in charge of its reorganisation.

They are clearly trying to clear a path for a very quick Chrysler-style case, said Stephen Lubben, a bankruptcy-law professor at Seton Hall University School of Law in Newark, New Jersey. They will use the bankruptcy code to separate good GM from bad GM.

In creating the good company, the US plans to speed GMs progress by turning more than $50 billion of loans into a 72.5% equity stake for the government, slashing company debt to about $17 billion, excluding financing obligations to suppliers and warranty programs, according to a regulatory filing on Thursday.

With unions accepting pay cuts, GM also will compete better in world markets with Japans Toyota Motor Corp., which overtook it as the worlds largest automaker last year, ending GMs 77- year reign.

The new GM will take some liabilities with it such as an auto supplier financing program and warranty obligations. Detroit-based GM had global liabilities of $176.4 billion as of December 31, 2008.

Pontiac models will be scrapped, along with as many as 16 factories, some of which may involve massive cleanup costs. GM must also try to find buyers for its Hummer and

Saturn units after not finding any takers so far.

Given the planned stakes, the new GM will be controlled by the US government, with the Canadian government possibly owning a small share. A union health-care trust will own 17.5% and 10% will be given to the old GM to hand to creditors to resolve claims, according to GMs filing.

The Treasury plans to allocate that 10 percent stake to bondholders, plus offer warrants to buy an additional 15% of equity, provided a satisfactory number of holders agree to go along with GMs restructuring program, according to the filing. Bondholders may get nothing if they dont satisfy the Treasury by 5 pm New York time on Saturday, GM said.

The sweetened offer and support of the bondholder committee increase substantially the chances that the transaction will be approved expeditiously by the bankruptcy court, said Richard Hahn, co-chairman of the bankruptcy practice at Debevoise & Plimpton LLP, a New York law firm not involved in GM negotiations.

GMs current stockholders would get no recovery from the new-entity asset sale, according to the filing, a change from an earlier plan to give them 1% of the new company.