Can You Spell C-h-a-p-t-e-r 11?
Bankruptcy Funding Solicited for Car Makers
By JEFFREY MCCRACKEN and JOHN D. STOLL
Outside advisers to the U.S. Treasury have started lining up the largest bankruptcy loan ever, talking with banks and other lenders about at least $40 billion in financing for General Motors Corp. and Chrysler LLC, in case the two auto makers need it, said several people familiar with the matter.
While acknowledging the grimness of the task, administration officials involved in the auto talks said they are trying to find a way to restructure the two companies without resorting to bankruptcy proceedings. They stressed the latest efforts were "due diligence" on the part of the government advisers, and that bankruptcy financing may not be necessary.
Still, people involved in talks with senior Obama administration officials said that the administration believes that the option of Chapter 11 filings by the two auto makers needs to be seriously considered.
"Everything is on the table right now," one person involved in the matter said, adding that President Barack Obama doesn't want to see more massive job losses in the auto industry. His administration also doesn't want to anger the United Auto Workers by appearing to push for bankruptcy, this person added.
The initial discussions call for private banks to provide the financing -- known as a debtor-in-possession, or DIP, loan -- with the government guaranteeing or backstopping the loan. In this scenario, some of the financing would be used to pay back the $17.4 billion the government lent GM and Chrysler late last year.
Treasury advisers are handling the effort and keeping GM and Chrysler informed of the steps through back-door channels, said the people familiar with the matter. The interplay between the government, auto makers and the markets is proving to be complicated.
Lenders are reluctant to commit funding to GM or Chrysler for several reasons -- mostly concern they won't get all their money back. Recently, the government advisers have begun aggressively courting big lenders Citigroup Inc. and J.P. Morgan Chase & Co. -- themselves government-aid recipients -- to participate in any bankruptcy financing, said people familiar with the matter.
The government advisers also are looking at ways the Treasury could "prime" other banks making DIP loans, so the government could be paid back before private creditors. Banks are deeply resistant to such steps. Both GM and Chrysler insist they can avoid bankruptcy, warning that option could cost the government as much as $125 billion in rescue financing. Bankruptcy experts say the sum isn't likely to be that high.
Even so, the estimated total of $40 billion in DIP financing GM and Chrysler would need would be five times as large as the previous record for such financing, which is used to fund day-to-day operations while companies sort out their debt. To fill such a large hole, Treasury's advisers are trying to corral as many as 70 lenders to participate in what is now informally called the "bank steering committee."
The advisers are sounding out banks about loan terms based on a government backstop, figuring out what interest rate the private market would accept and what covenants or restrictions lenders would expect.
At a news conference Tuesday, GM Chairman and Chief Executive Rick Wagoner, once a fierce opponent of even talking about a bankruptcy filing in public, said GM could engage in talks soon with the government on how to fund a stay in bankruptcy court. "We haven't had extensive discussions yet with the government on DIP financing," he said.
DIP loans are usually viewed as among the safest loans because those lenders typically get paid before other creditors. However, that corner of the lending market froze up late last year and has only recently begun to thaw.
Interest rates for bankruptcy financing have spiked in recent months, more than doubling from a year ago. In 2006 and 2007, the rate on the average DIP loan was the London interbank offered rate plus about 4 to 4.5 percentage points. Last year, the rate on the average DIP loan jumped to Libor plus 6.1 points, and rose throughout the year. A backstop by the federal government, however, probably would make such a loan less expensive.
Bankruptcy experts say that absent government support, lenders wouldn't step in to aid GM and Chrysler, given the proposed size of the loan and the tightness of credit markets. Most likely, the bankruptcy loan would roll up -- or pay off -- the $17.4 billion the government has so far lent the two auto makers. It might also pay off some other debt, including a senior bank facility.
Advising the Treasury on the GM-Chrysler situation are law firms Cadwalader, Wickersham & Taft LLP and Sonnenschein Nath & Rosenthal LLP, and the New York investment-banking firm of Rothschild Inc.
Cadwalader attorneys, who are in charge of advising the government on DIP lending and other matters, declined to comment. A spokeswoman for Sonnenschein declined to comment. Rothschild didn't return phone calls seeking comment.
In early January, Cadwalader bankruptcy attorney Deryck Palmer helped line up $8 billion in DIP financing for chemical company Lydondell Basell, the current record for such a loan.
So far, GM has received $13.4 billion in federal loans, The viability plan it submitted to the government last week said the company needs a total of $30 billion in aid, or $16.6 billion more than it has already gotten. GM also said it needs at least $7.7 billion in loans from the Department of Energy to develop fuel-efficient technology.
Chrysler has received $4 billion in government loans and said it needs $5 billion more. It said it would need $24 billion in financing if the company were to seek bankruptcy protection.
GM said it might need as much as $100 billion in financing from the government if it were to go through the conventional bankruptcy process. GM's $100 billion estimate stems from the belief that it would suffer "catastrophic revenue reduction impact" in a prolonged conventional Chapter 11 process, as it would expect to sustain as much as an 80% decline in sales after a bankruptcy filing. GM would need financing not only so it could weather the storm, but also to help its suppliers and dealers survive.
Mr. Wagoner, the GM CEO, said the bankruptcy scenarios are "risky" and "costly," and would only be pursued as a last resort. "We haven't had extensive discussions yet with the government on DIP financing," he said. "They asked us to put together and address the topic. We've done that in [GM's viability plan], so I suspect we may enter into those discussions."
Write to Jeffrey McCracken at jeff.mccracken@wsj.com and John D. Stoll at john.stoll@wsj.com
By JEFFREY MCCRACKEN and JOHN D. STOLL
Outside advisers to the U.S. Treasury have started lining up the largest bankruptcy loan ever, talking with banks and other lenders about at least $40 billion in financing for General Motors Corp. and Chrysler LLC, in case the two auto makers need it, said several people familiar with the matter.
While acknowledging the grimness of the task, administration officials involved in the auto talks said they are trying to find a way to restructure the two companies without resorting to bankruptcy proceedings. They stressed the latest efforts were "due diligence" on the part of the government advisers, and that bankruptcy financing may not be necessary.
Still, people involved in talks with senior Obama administration officials said that the administration believes that the option of Chapter 11 filings by the two auto makers needs to be seriously considered.
"Everything is on the table right now," one person involved in the matter said, adding that President Barack Obama doesn't want to see more massive job losses in the auto industry. His administration also doesn't want to anger the United Auto Workers by appearing to push for bankruptcy, this person added.
The initial discussions call for private banks to provide the financing -- known as a debtor-in-possession, or DIP, loan -- with the government guaranteeing or backstopping the loan. In this scenario, some of the financing would be used to pay back the $17.4 billion the government lent GM and Chrysler late last year.
Treasury advisers are handling the effort and keeping GM and Chrysler informed of the steps through back-door channels, said the people familiar with the matter. The interplay between the government, auto makers and the markets is proving to be complicated.
Lenders are reluctant to commit funding to GM or Chrysler for several reasons -- mostly concern they won't get all their money back. Recently, the government advisers have begun aggressively courting big lenders Citigroup Inc. and J.P. Morgan Chase & Co. -- themselves government-aid recipients -- to participate in any bankruptcy financing, said people familiar with the matter.
The government advisers also are looking at ways the Treasury could "prime" other banks making DIP loans, so the government could be paid back before private creditors. Banks are deeply resistant to such steps. Both GM and Chrysler insist they can avoid bankruptcy, warning that option could cost the government as much as $125 billion in rescue financing. Bankruptcy experts say the sum isn't likely to be that high.
Even so, the estimated total of $40 billion in DIP financing GM and Chrysler would need would be five times as large as the previous record for such financing, which is used to fund day-to-day operations while companies sort out their debt. To fill such a large hole, Treasury's advisers are trying to corral as many as 70 lenders to participate in what is now informally called the "bank steering committee."
The advisers are sounding out banks about loan terms based on a government backstop, figuring out what interest rate the private market would accept and what covenants or restrictions lenders would expect.
At a news conference Tuesday, GM Chairman and Chief Executive Rick Wagoner, once a fierce opponent of even talking about a bankruptcy filing in public, said GM could engage in talks soon with the government on how to fund a stay in bankruptcy court. "We haven't had extensive discussions yet with the government on DIP financing," he said.
DIP loans are usually viewed as among the safest loans because those lenders typically get paid before other creditors. However, that corner of the lending market froze up late last year and has only recently begun to thaw.
Interest rates for bankruptcy financing have spiked in recent months, more than doubling from a year ago. In 2006 and 2007, the rate on the average DIP loan was the London interbank offered rate plus about 4 to 4.5 percentage points. Last year, the rate on the average DIP loan jumped to Libor plus 6.1 points, and rose throughout the year. A backstop by the federal government, however, probably would make such a loan less expensive.
Bankruptcy experts say that absent government support, lenders wouldn't step in to aid GM and Chrysler, given the proposed size of the loan and the tightness of credit markets. Most likely, the bankruptcy loan would roll up -- or pay off -- the $17.4 billion the government has so far lent the two auto makers. It might also pay off some other debt, including a senior bank facility.
Advising the Treasury on the GM-Chrysler situation are law firms Cadwalader, Wickersham & Taft LLP and Sonnenschein Nath & Rosenthal LLP, and the New York investment-banking firm of Rothschild Inc.
Cadwalader attorneys, who are in charge of advising the government on DIP lending and other matters, declined to comment. A spokeswoman for Sonnenschein declined to comment. Rothschild didn't return phone calls seeking comment.
In early January, Cadwalader bankruptcy attorney Deryck Palmer helped line up $8 billion in DIP financing for chemical company Lydondell Basell, the current record for such a loan.
So far, GM has received $13.4 billion in federal loans, The viability plan it submitted to the government last week said the company needs a total of $30 billion in aid, or $16.6 billion more than it has already gotten. GM also said it needs at least $7.7 billion in loans from the Department of Energy to develop fuel-efficient technology.
Chrysler has received $4 billion in government loans and said it needs $5 billion more. It said it would need $24 billion in financing if the company were to seek bankruptcy protection.
GM said it might need as much as $100 billion in financing from the government if it were to go through the conventional bankruptcy process. GM's $100 billion estimate stems from the belief that it would suffer "catastrophic revenue reduction impact" in a prolonged conventional Chapter 11 process, as it would expect to sustain as much as an 80% decline in sales after a bankruptcy filing. GM would need financing not only so it could weather the storm, but also to help its suppliers and dealers survive.
Mr. Wagoner, the GM CEO, said the bankruptcy scenarios are "risky" and "costly," and would only be pursued as a last resort. "We haven't had extensive discussions yet with the government on DIP financing," he said. "They asked us to put together and address the topic. We've done that in [GM's viability plan], so I suspect we may enter into those discussions."
Write to Jeffrey McCracken at jeff.mccracken@wsj.com and John D. Stoll at john.stoll@wsj.com
Labels: Economic news, Political economics
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