Tuesday, March 31, 2009

GM sees bankruptcy risk

By Kevin Krolicki and Soyoung Kim Kevin Krolicki And Soyoung Kim – Tue Mar 31, 7:02 pm ET

WASHINGTON/DETROIT (Reuters) – General Motors warned on Tuesday there was a rising chance it could file for bankruptcy by June as Fiat and Chrysler executives met in a race to complete a tie-up the U.S. government has said Chrysler needs to survive.

GM shares tumbled 28 percent, its bonds fell and the cost to insure its debt rose, as the markets began to price in a bankruptcy that could wipe out stock holders and force deep losses on other creditors, even under the quick and "surgical" process described earlier by U.S. officials.

GM and Ford Motor Co, which has not sought a bailout, announced incentives to woo recession-wary customers by covering some car payments for customers who lose their jobs.

U.S. auto sales for March are expected to have fallen 40 percent from a year ago when sales data is released on Wednesday.


In Detroit, GM and Chrysler began work to implement the tough restructuring dictated by the Obama administration as a condition for providing more taxpayer funds to the struggling automakers.

Fiat Chief Executive Sergio Marchionne flew to Detroit for talks with Chrysler's labor unions and creditors after President Barack Obama gave the companies 30 days to set up a partnership to save the ailing car group.

Advisers to both GM and Chrysler have also been working in parallel to prepare for potential bankruptcy filings that would aim to preserve the best elements of the struggling companies while slashing debt and cutting pension and health care costs.

BANKRUPTCY OPTIONS

One possible plan under discussion for GM would quickly form a new company representing the automaker's best assets while its laggard brands and money-losing assets would remain under bankruptcy protection, a person familiar with the strategy told Reuters.

GM stock has lost almost half its value since Monday when Obama outlined policies sharply limiting taxpayer funds for automakers that many had expected him to rescue.

Chief Executive Fritz Henderson -- installed in the job on Monday in a shake-up that included the GM board -- said the top U.S. automaker would have to close more plants and shed more factory jobs than it planned just a month ago.

"We need to go deeper and we need to go faster," Henderson told a news conference at GM's Detroit headquarters.

His predecessor, Rick Wagoner, was forced out by the Obama administration, which gave GM 60 days to reach deeper concessions with bondholders and the United Auto Workers union. The U.S. Treasury would finance a court-supervised bankruptcy for GM if the process failed to deliver enough savings.

"By no later than June 1, if we're not able to accomplish this outside bankruptcy, we'll be in bankruptcy. It's pretty clear. The government was unequivocal," Henderson said.

'PENNIES ON THE DOLLAR'

Bondholders, a key constituency in the GM restructuring, said they were braced for a reduced offer of "pennies on the dollar" for about $28 billion in GM debt.

GM last week had offered bondholders about $6.5 billion in cash and new debt -- equal to a combined 24 cents on the dollar -- in addition to a 90-percent stake in the new company, a person with knowledge of the terms sheet told Reuters.

The $13.4-billion emergency loan for GM approved by the Bush administration in late December had offered bondholders a payout of 33 cents on the dollar in equity, terms that they had rejected.

GM's 8.375-percent bonds due 2033 were trading on Tuesday at 12.75 cents on the dollar, according to MarketAxess.

"Bondholders have to understand that they have to come to the table. So far they've held back. There's no holding back anymore. In bankruptcy, they'd likely come away with nothing," said Representative Sander Levin, a Democrat from Michigan.

Standard & Poor's on Tuesday cut its ratings on Fiat to "junk" status and said it may cut them again, citing weak liquidity and upcoming debt maturities.

Fiat investors have worried that the company could end up contributing cash or debt guarantees to the Chrysler partnership at a time when its own finances are strained.

Chrysler, privately held by Cerberus Capital Management, has been surviving on a $4 billion emergency loan from the U.S. government.

Fiat has agreed to contribute access to its small-car technology and vehicle platforms to Chrysler in exchange for a stake in the U.S. automaker that would start at 20 percent.

"We do not expect Fiat to commit any significant funds to support Chrysler following the U.S. government's most recent analysis of Chrysler's financial needs to survive," S&P said in a statement. "Still, we expect more details in the coming weeks on the proposed Chrysler-Fiat alliance."

LOSE THE JOB, KEEP THE CAR

GM and Ford said they would cover some car loan payments for customers who lose their jobs, an offer aimed at consumers sidelined by the recession and worried about job security.

GM said it would cover nine payments, up to $500 per month, if GM car buyers lost their income. Ford will cover payments for up to a year if customers lose their jobs.

Both programs, being offered in addition to zero-percent financing, come at a time when U.S. auto sales are at their lowest levels in nearly three decades.

South Korea's Hyundai Motor Co has outperformed rivals in the slumping U.S. market after launching a program in January that allows laid-off workers to return cars they financed.

Hyundai's sales rose 5 percent in the first two months of the year while overall U.S. sales tumbled 39 percent.

(Additional reporting by John Crawley, Emily Chasan, Walden Siew and David Bailey)


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GM, Chrysler race deadlines to hold off bankruptcy

By TOM KRISHER, AP Auto Writer Tom Krisher, Ap Auto Writer
– Tue Mar 31, 9:22 pm ET

DETROIT – He doesn't know exactly what the Obama administration wants him to cut, but Fritz Henderson, the new CEO of General Motors Corp., isn't waiting around to find out. Cut deeper. Work harder. Move faster. That's how he described the ailing automaker's urgent effort to meet a June 1 deadline to fix its debt-ridden balance sheet, cut billions in costs and take other steps to transform itself into a profitable entity.

It's the same government-imposed race that Chrysler LLC is running, only GM's smaller neighbor has to cover more distance in half the time.

The Auburn Hills, Mich., automaker must make the same cuts as GM, and sign up Fiat Group SpA as a partner, all in 30 days. Fiat's CEO jetted to Detroit for intense negotiations, but if Chrysler doesn't meet the deadline, it's almost certainly destined for the auction house.

For GM, failing to take quick action means surrendering to court supervision in bankruptcy. The company has resisted bankruptcy talk in the past, but Henderson said Tuesday it is now "certainly more probable."

The companies have yet to receive specifics from the task force on how much more they must cut and where, but Henderson is proceeding with deeper cuts and pulling previously announced measures forward.

"We need to reinvent General Motors, and we need to do it in a very, very abbreviated time frame here in 2009 so that we're not spending our time careening from crisis to crisis in the future," he told reporters at GM's headquarters complex in downtown Detroit.

There are formidable obstacles, though. Even with less demanding hurdles in the government's original loan terms, GM's bondholders have been reluctant to settle their $28 billion for what may be pennies on the dollar. The company still hasn't reached a deal with the United Auto Workers on funding a union-run trust that will take over retiree health care costs.

It's uncertain whether they can work together to compromise on their competing interests, even though failure means they stand to lose a lot more.

It was clear, though, that every scenario will include more pain for just about anyone connected with the companies.

GM said in its February plan it would cut 47,000 jobs worldwide by the end of the year. Presumably those cuts will come sooner.

Henderson said GM also must slash its staggering liabilities — not just the $49 billion in bond debt and secured loans, but also pension obligations and retiree health care costs.

"We need to basically address all of our level of indebtedness, because in fact, what they want is a healthy balance sheet, and that healthy balance sheet needs to address each of these constituencies," he said.

Henderson wouldn't say specifically if pensions or health care would change, but it's likely that GM's 400,000 U.S. retirees and spouses will see benefit cuts, along with its 244,000 active workers.

He said the company probably will close more than the five factories it promised to shutter in its February restructuring plan filed with the government. More buyout and early retirement offers are likely.

If GM doesn't satisfy the government in time, a short bankruptcy would allow the company to wipe out its debt, change contracts and emerge as a healthy business. The government is backing automakers' warranties and has pledged financing for GM.

For Chrysler, however, Obama's auto task force has decided it has no chance to survive alone, and it would be left to get sold off in pieces. There were signs of progress, however, that a partnership could be arranged.

Fiat CEO Sergio Marchionne flew to Detroit late Monday for talks, and the Italian automaker agreed to reduce its stake in Chrysler from 35 percent to 20 percent in exchange for providing small-car technology, according to a person briefed on the negotiations who was not authorized to speak publicly. Under the new terms, Fiat's share would increase in 5 percent increments every time certain milestones are met, the person said.

At GM, Henderson said the 60 days should be enough time to accomplish its work, but bankruptcy could come before then if GM management and the government determine it won't be able to meet the deadline.

"If it's quite clear that we're not able to accomplish what we need to do in terms of operational restructuring, reduction of debt on the balance sheet and what we need to do to accomplish these broad parameters of having a viable business, this will be a management judgment," Henderson said.

Besides slashing costs, GM must start selling more cars, and the company announced Tuesday its own version of a plan that will make car payments for customers who lose their jobs through no fault of their own. It's called "Total Confidence," and its designed to pull in timid buyers who fear the economy will claim their employment.

The company, Henderson said, counted on revenue for too long from trucks and sport utility vehicles. Now, every vehicle has to turn a profit. That means unprofitable cars and trucks could get the ax, and soon.

"The view is everything's got to pay rent in our product portfolio," he said.

GM also has to jettison unprofitable brands, including iconic Hummer. A decision on closing or selling was supposed to be revealed Tuesday, but GM is still talking with potential buyers. Henderson said an announcement will come within weeks.

GM is alive today only because of $13.4 billion in government loans, and Henderson wouldn't reveal how much more money the century-old company will need to get through the 60 days. The Treasury Department has not told the company how much money it will get to sustain itself, but Henderson said he doesn't expect a dollar more than necessary.

"We submit reports to them weekly in terms of our cash, both in the U.S. and on a global basis," he said. "They know exactly where we are and exactly what we are doing."

Henderson, officially named CEO by the GM board on Sunday, said he isn't worried that the government will fire him like it did his predecessor, longtime CEO Rick Wagoner.

"They've asked me to do the job. I'm not going to really worry about how long that's going to be," he said. "I figure if we get our job done, which is where I'm going to focus my attention, it's going to be OK. And if they want to replace me they can do it."

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AP Business Writer Colleen Barry in Milan, Italy, contributed to this report.

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