February 18, 2009 / 5:19 PM / in 9 years

Bankruptcy remains an option for GM, analysts say

DETROIT (Reuters) - A government-backed bankruptcy reorganization remains an option for saving General Motors Corp and Chrysler LLC, analysts said on Wednesday, even though the automakers have said they would rather not go down that road.

<p>Car salesman Ray Schaffer (L) shows a customer a 2009 Chevrolet Impala sedan at a dealership in Dearborn, Michigan December 29, 2008. REUTERS/Rebecca Cook</p>

GM and Chrysler asked for billions of dollars more in federal aid on Tuesday and announced sweeping changes including capacity reductions and job cuts.

Some Wall Street analysts were disappointed that the restructuring plans submitted to the U.S. Treasury did not include key concessions from the United Auto Workers union and the automakers’ bondholders.

One analyst said that taking the bankruptcy option off the table would reduce the bargaining power of the companies.

Both GM and Chrysler analyzed a possible bankruptcy filing in their restructuring plans but stressed that it was not their preferred method for reorganizing and that they hoped to avoid this scenario.

GM, which has requested $16.4 billion in additional loans from the U.S. government for a total of up to $30 billion, has said it would run out of cash as soon as March without new federal funding.

The request came shortly after smaller rival Chrysler asked for another $5 billion in aid.

GM’s request that a sizable chunk of total aid come in the form of preferred equity rather than debt is a “tacit acknowledgment of the fact that GM may emerge from an out-of-court process as a still highly levered firm,” JP Morgan analyst Himanshu Patel said.

David Leiker, analyst with Robert W. Baird, still sees bankruptcy as the best option for a reorganization.

“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.

In its restructuring blueprint, GM estimated that if it were forced to reorganize in a traditional bankruptcy, the tab for the government could touch $100 billion in bankruptcy financing.

Chrysler estimated that the bill for its bankruptcy could hit $1,200 per taxpayer.

GM also outlined cost-reduction actions but still has to reach an agreement with its bondholders and the UAW on how to reduce the roughly $48 billion it owes both groups.

An equity-for-debt swap, which is being considered, could significantly hit stockholders.

“A substantial majority of the pro-forma equity in General Motors would be distributed to exchanging bondholders and the UAW VEBA,” Credit Suisse analyst Chris Ceraso said. “The existing equity holders would largely be wiped out by the bond and VEBA exchanges.”

The UAW VEBA is trust fund set up to cover employee healthcare costs.

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 corporate advisory and restructuring services firm.

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 U.S. Securities and Exchange Commission filings by companies.

“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.

GM shares were down 9 cents or 4.13 percent at $2.09 in afternoon trading on the New York Stock Exchange.

Reporting by Poornima Gupta and David Bailey, editing by Matthew Lewis and Gerald E. McCormick

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