Auto bankruptcy: quick surgery or long slog?
NEW YORK/DETROIT (Reuters) - The U.S. government, now directing the turnarounds of General Motors Corp (GM.N) and Chrysler, has said bankruptcy for both could be fast, clean and targeted -- like surgery or a "quick rinse."
But bankruptcy has been described by those who pass through it as a world of pain and regret, and skeptics question whether the developing plans for bankruptcies at the cash-strapped automakers could hit unforeseen snags down the road.
"They could get delayed in kind of a knock-down, drag-out bankruptcy with every problem they have," said Roger Frankel, chairman of the restructuring group at law firm Orrick, Herrington & Sutcliffe LLP, who is not advising the automakers.
The best and most recent example of an auto bankruptcy gone wrong: Delphi Corp DPHIQ.PK, the former parts division that GM spun off in 1999 to save money. Delphi filed for bankruptcy protection in 2005 and planned to retool its operations into a stronger, leaner company. But the company ran into difficulties with its exit financing and remains in Chapter 11 as a continuing drag on GM.
"Delphi's bankruptcy has been a real disappointment," said Kirk Ludtke, senior vice president at CRT Capital Group. "Delphi has made a lot of progress ... but the outcome has been a huge disappointment for investors."
For GM or Chrysler, the risk is that any bankruptcy could be somehow derailed, the way Delphi's was, and drag on for months or years with stakeholders holding fast to opposing positions, all funded in this case by the U.S. taxpayer.
Even if GM and Chrysler and their small army of legal and financial advisers separate the "old" or "bad" assets from the companies that would be expected to emerge from the process, the "new" or "good" company could not be fully independent.
Automakers have tightly-knit operations -- from development to parts supplies, assembly and distribution -- that would likely require years of cooperation between the so-called good parts of the company and those hived off in bankruptcy.
Years after Delphi's bankruptcy, GM is now effectively subsidizing part of Delphi's parts production and may have to take back uncompetitive Delphi plants that produce components critical to GM's vehicle lineup.
Talks on a deal on those terms had been underway before Monday's announcement from the Obama administration.
There is also a risk to the image of GM and Chrysler, already badly damaged by months of uncertainty about whether they can survive.
The U.S. government has offered to guarantee the warranties on GM and Chrysler vehicles as they restructure, but that alone may not be enough to bring consumers back into showrooms.
For that reason, the revenue risk from a bankruptcy by a major automaker is "unknown and unknowable," GM Chief Executive Fritz Henderson told reporters on Monday.
Henderson said he was willing to take GM into bankruptcy if necessary and GM could file for protection before the 60 days of funding are up if it is clear agreements cannot be reached. He was skeptical himself that a government-guided bankruptcy would be a "clean rinse."
"It is always easier to write than to do," Henderson said.
Bankruptcy also is a very expensive process -- GM said in February that a traditional bankruptcy could require $100 billion of financing from the U.S. government. That figure, if it comes to fruition, would be more than 10 times the size of the largest debtor-in-possession bankruptcy loan in history.
In Delphi, for example, the tab for the cadre of advisers to the parts supplier, and the committees that include representatives of creditors, has topped $400 million so far.
But the biggest risk of a quick bankruptcy, experts say, is that they can rob companies of an opportunity to fully restructure and are sometimes unsuccessful, ending up in a second trip to bankruptcy court, or a "Chapter 22."
"A reorganization plan can't just be short-term turnaround, the longer term issues will have to be addressed," said Lois Lupica, a bankruptcy professor at University of Maine School of Law. "The fundamental issue here is that the business model doesn't work."
(Editing by Phil Berlowitz)
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