Q&A: Chapter 11 filing and General Motors

By Bernard Simon in Detroit, published on FT.com

Published: May 31 2009 16:59 | Last updated: May 31 2009 16:59

What is the purpose of a Chapter 11 filing?
Chapter 11 of the US bankruptcy code is designed to allow an ailing company to reorganise its operations and balance sheet under court protection from creditors.

The company typically remains in business but every important decision requires court approval.

Judges tend to give priority to the interests of the bankrupt entity, putting a high bar on disaffected creditors and suppliers or others seeking to derail the restructuring.

this what will happen to General Motors?
Up to a point.

GM, like Chrysler, is set to take a different route from the normal Chapter 11 process, using section 363 of the bankruptcy code. It will ask the court to hive off most of its assets and about a quarter of its existing liabilities into a “new” GM.

If all goes to plan, the new GM will emerge within two to three months, sooner than a typical Chapter 11 case.

The unwanted businesses – mostly plants and properties – will remain in Chapter 11 to be sold or wound down. This is likely to take years as creditors jockey for advantage.

Why is GM following this route?
Speed is of the essence.

Until recently, GM had resisted a bankruptcy filing over fears that consumers would hesitate to buy a vehicle from a company that might be unable to honour warranties or supply spare parts down the road.

The US and Canadian governments have sought to assuage these fears by underwriting warranties on GM – and Chrysler – vehicles.

Even so, GM is likely to lose market share in coming months, especially to Ford, the only Detroit carmaker not being kept afloat by taxpayers’ money.

The longer the process drags on, the more difficult it will be for the new GM to regain lost ground.

Who will own the new GM?
The US Treasury and the Canadian government will together hold 72.5 per cent of the common equity.

A United Auto Workers union healthcare fund will have a 17.5 per cent stake, leaving 10 per cent for unsecured bondholders.

The bondholders will also receive warrants to acquire another 15 per cent of the equity. Existing shareholders will receive no more than a nominal amount.

What else will be different?
GM will shrink.

The company is in the throes of selling a big chunk of its European operations.

It will close more than a dozen North American plants and sever relations with more than 40 per cent of its dealers.

Four of its eight brands – Pontiac, Saturn, Hummer and Saab – will be sold or disappear, leaving Chevrolet, Cadillac, Buick and GMC.

GM plans to hold on to its Latin American and Asian operations.

What lessons can GM draw from Chrysler’s stay in Chapter 11?
Mostly encouraging ones.

Lawyers are in awe of how quickly and forcefully Chrysler has barrelled its way through Chapter 11.

The US government has played a critical behind-the-scenes role in moving the process along.

Italy’s Fiat concentrated minds after it set a mid-June deadline for its proposed pact with Chrysler to be consummated.

A bankruptcy judge sympathetic to Chrysler’s plight has helped.

But GM’s case is far bigger and more complex.
Copyright The Financial Times Limited 2009