Big Three resist bankruptcy action to avoid dire impact

An automaker bankruptcy would be devastating to the economy.

Detroit Free Press

WASHINGTON — Despite vows by top officials to avoid bankruptcy, fear is high that dwindling cash reserves could push one or more of Detroit’s three automakers into court protection within the next several months.

Even a hypothetical glimpse of the consequences shows why executives insist bankruptcy is not an option.

The fallout would likely range from thousands of jobs cut at factories and offices to the slashing of jobs at suppliers and dealers, the shredding of benefits for workers and losses for investors and pension plans.

A bankruptcy by an automaker would easily become one of the most complex legal fights ever, with thousands of parties scratching for a piece of whatever’s left. And with one in 10 U.S. jobs supported by the industry, millions of workers could be affected.

“The impact would be devastating,” said Kevin Tynan of Argus Research.

Delphi Corp.’s bankruptcy offers a scaled-down look at what automakers could face. After three years in court, the parts supplier has shed 27,000 U.S. hourly employees — more than two-thirds of its blue-collar workers — and cut U.S. salaried employees by nearly half to 7,700. Despite the steep cuts and renegotiated union contracts, the company has yet to find enough financing to pay its reduced debts and emerge from bankruptcy.

GM Chairman and Chief Executive Rick Wagoner repeatedly ruled out a court reorganization as an option Friday, even though the company could run short of cash before the end of the year, saying the automaker was convinced “the consequences of bankruptcy were dire.”

Shelly Lombard, analyst with Gimme Credit, said it was now a high probability that GM would face bankruptcy.

“I think they file” if they don’t get government assistance, she said. “This recession is going to be longer and deeper than we ever thought. I don’t think they can withstand that.”

Business bankruptcy was designed to give companies relief from overwhelming debts to reorganize, cut costs and eventually start over.

Many of the changes Detroit automakers have said they need to survive, such as fewer dealers, lower health care costs and more competitive supplier contracts, would be within reach under bankruptcy.

But while airlines, retailers, suppliers and other businesses can usually protect their revenues in a bankruptcy, automakers have long maintained that customers simply wouldn’t spend $25,000 on a vehicle from a bankrupt automaker. Earlier this year, CNW Marketing/Research found that 80 percent of new vehicle shoppers would avoid a carmaker in bankruptcy; the figures were higher if the automaker was one from Detroit.

The effects on the business would be far more certain. Workers would face layoffs and plant closings; those who survived would likely face pay and benefit cuts. In a worst case, an automaker could ask to cancel its contract with the UAW and throw its pension benefits to the government.

A bankruptcy filing would infect the entire supply chain, putting additional strain on beleaguered suppliers by halting payments and forcing some into bankruptcy themselves.

An automaker could use bankruptcy to attempt a cull of its dealer body — but it’s not clear by how much, since auto dealers are protected not only by their agreements with automakers but by state laws carefully honed by dealer lobbying.

The doors to bankruptcy court may be closed even if an automaker wanted to open them for the same reason the industry is in trouble — a lack of credit.

Large corporations typically take out loans called debtor-in-possession financing to keep the business running through a bankruptcy, with the lenders getting first crack at owning a piece of the reworked business.

But the credit crisis has crimped those loans, and a company the size of a Detroit automaker would need one of the largest such deals ever, easily passing the $4.5 billion that Delphi arranged.

Citigroup analyst Itay Michaeli said in a note earlier this year that a Detroit automaker pushed to the brink of default likely would try to work out a restructuring outside of court — luring investors and the UAW to the table with the prospect of a far better outcome for all sides than a bankruptcy.