Auto bankruptcy? Sure looks like it

February 14, 2009 at 12:00a.m.

DETROIT (AP) — Call it a bankruptcy in disguise. Although General Motors and Chrysler are scrambling to pull together plans by Tuesday showing that it makes sense for the government to support them without invoking the dreaded “B-word,” the efforts look like a classic case of reorganization.

The $13.4 billion in bridge loans the Treasury Department has disbursed so far come with conditions that are typical when restructuring a company: Bondholders are being pressed to take losses and convert debt to equity, union contracts are being negotiated, and current shareholders would see their equity close to wiped out.

“Right now the auto industry pretty much is in bankruptcy,” said Douglas Bernstein, managing partner of the Banking, Bankruptcy and Creditors’ Rights Practice Group at the law firm Plunkett Cooney. “The only thing that hasn’t been done, is the filing fee hasn’t been paid.”

Even under a bankruptcy scenario, the government still would be the most likely provider of financing for the automakers, said Michael Fleming, another attorney at Plunkett Cooney. Given the current lending environment and stigma attached to the auto industry, no banks or other lenders are likely to step up to provide debtor-in-possession financing that funds a typical reorganization.

Auto executives are loathe to consider actually filing for court protection, saying consumers already avoiding dealerships due to the economy and tighter credit conditions would never buy a car from a bankrupt automaker.

But it might be the only mechanism for General Motors Corp. and Chrysler LLC to satisfy the conditions of the government aid keeping companies afloat in the worst U.S. auto sales climate in 26 years. The Treasury Department last month hired two law firms with bankruptcy expertise to explore possible restructuring.

GM’s loan terms require it to convert at least two-thirds — or about $18 billion — of its debt to equity. If not enough bondholders agree, the only choice may be to reduce the debt through Chapter 11 bankruptcy.

Chrysler isn’t publicly traded, but the conditions will severely dilute the ownership stake of its current owners, Cerberus Capital Management LP and Daimler AG.