GM bankruptcy threat could break talks impasse

DETROIT (Reuters) - General Motors Corp and Chrysler LLC were both put on notice by the Obama administration on Monday and markets reacted with dismay to the specter of bankruptcy for the troubled automakers that could wipe out equity and add to the huge losses of creditors.

Yet some analysts say the hard line delivered by U.S. President Barack Obama's autos task force may just be the tonic needed to bring the warring GM factions -- the United Auto Workers and bondholders -- back to the bargaining table.

"The bondholders are going to step up. That has just not taken place," said Sen. Carl Levin, a Michigan Democrat who was briefed by Obama on the plan late on Sunday. "(The bondholders) will hopefully see that they have a pretty stark choice."

GM, which had been looking to cut unsecured debt by about $19 billion, hit a roadblock in talks with bondholders and the union recently, with both being offered stock in a recapitalized GM in exchange for concessions.

The UAW has accused the bondholders of pushing 775,000 retirees toward hardship, while GM's creditors say they were presented with an unworkable plan that would have left the company saddled with too much debt.

Now both sides face the risk of deeper losses as bankruptcy looms and the market reaction was swift and harsh -- GM shares closed down more than 25 percent at $2.70 on Monday.

Kip Penniman, an analyst with KDP Investment Advisors, said bondholders had leverage in the negotiations because of the Obama administration's desire to avoid deeper job cuts that could accompany a bankruptcy.

"The UAW, from a financial standpoint and a human cost standpoint, has the most to lose if GM goes into a long- duration bankruptcy," he said.

Bondholders said on Monday they were still willing to exchange a substantial part of the $27 billion debt for equity if they see a viable business plan.

A committee of GM debt holders, including Franklin Templeton Investments, Fidelity Investment and Loomis Sayles & Co, have been in talks with the automaker since early this year.

CHANGING COURSE

In a sharp reversal of the company's earlier stand, GM interim Chief Executive Fritz Henderson said the automaker was now open to the kind of "surgical" bankruptcy described by officials if other options failed.

Henderson took the top job on Monday after Rick Wagoner stepped aside at the request of the autos task force headed by former investment banker Steve Rattner.

Both Wagoner and the board had long campaigned against a bankruptcy filing, saying it would damage GM's sales and send it into a disastrous liquidation.

But Wagoner's departure and the new line taken by his successor convinced some analysts GM could now be moving toward bankruptcy as a way to reduce debt.

"To take an enterprise the size of GM through a quick bankruptcy would be unprecedented, but these are unprecedented times," said Brad Coulter, restructuring adviser at Detroit area firm, O'Keefe & Associates.

"Reading between the lines, I think they are saying GM is on the path to bankruptcy on a fast track."

A GM bankruptcy would put most of the pressure on the UAW, which could see its contract with the automaker dissolved in court, even after negotiating deep concessions on healthcare and entry-level wages.

"Labor has made, I think, fairly aggressive concessions, but it's going to have to go back to the table," Jared Bernstein, a member of the autos task force told Reuters Financial Television.

GM now faces an end of May deadline after the U.S. government promised only to fund the automaker's operations for the next 60 days in consultation with advisers from the task force and external consultants.

For its part, Chrysler has 30 days to clinch an alliance with Fiat SpA and reach its own deal with creditors. Privately held Chrysler needs to get a consortium of bank lenders, including J.P. Morgan, Goldman Sachs Group Inc and Citigroup Inc to write down the value of $6.8 billion in first-lien loans secured by the automaker's assets, including the famous Jeep brand.

Chrysler owner Cerberus Capital Management has a second- lien loan for $500 million, while former owner Daimler AG is owed $1.5 billion. Both those credits could be wiped out in either a bankruptcy or negotiated debt exchange.

GM wanted as much as an additional $16 billion in loans, while Chrysler has asked for $5 billion.

Analysts said GM needed to slash its debt to have a chance of riding out the brutal downturn in sales.

Deutsche Bank analyst Rod Lache said GM could still be burdened with close to $74 billion of debt after a restructuring, including $18 billion in government loans.

Lache has a price target of "zero" on GM shares.

Bank of America Merrill Lynch analyst John Murphy said GM's total debt could approach $100 billion if it can't reach a deal with the UAW and bondholders.

"This is the major reason we believe that Chapter 11 is the likely outcome for GM, despite the best efforts of the auto task force to avoid court," he said in a note for clients.

(Additional reporting by Dena Aubin in New York; reporting by Poornima Gupta, Kevin Krolicki and David Bailey; editing by Patrick Fitzgibbons and Andre Grenon)