By John Hughes, Caroline Salas, Jeff Green and Bob Van Voris
June 1 (Bloomberg) -- General Motors Corp., the world’s largest automaker for 77 years, began filing for bankruptcy by putting a New York affiliate into Chapter 11, a landmark for an industry that defined American economic might.
Chevrolet-Saturn of Harlem Inc., sought bankruptcy protection today, the first of many filings in the bankruptcy process. While GM hasn’t yet filed, the affiliate called the parent company a “debtor in possession under Chapter 11,” in court documents, a reference to the main U.S. bankruptcy law.
The move follows the bankruptcy filing of Chrysler LLC and represents the Obama administration’s attempt to remake a 100- year-old company that became burdened by higher costs than competitors and a reliance on fuel-guzzling light trucks as gasoline prices rose. Japan’s Toyota Motor Corp. surpassed Detroit-based GM last year as the world’s largest automaker.
“Our objective is to make sure we’re limiting our involvement to the minimum necessary, and that we get out of those involvements as quickly as we can,” Treasury Secretary Timothy Geithner said today in Beijing. “We want to have a quick, clean exit as soon as conditions permit.”
The “new GM” will get $30.1 billion in bankruptcy financing from the government, and the Treasury “does not anticipate providing any additional assistance” after that, the Obama administration said yesterday in a statement. The federal government will have a 60 percent equity stake in the retooled automaker, and 12 percent will be held by the Canadian government, which is lending $9.5 billion to the company.
Restructuring Chief
Al Koch, a managing director at the advisory company AlixPartners LLP in New York, will be the company’s chief restructuring officer, reporting to Chief Executive Officer Fritz Henderson, according to the Harlem affiliate filing. The unit filed to give federal courts in New York jurisdiction over the case.
“Any suggestion that an American corporate icon like GM could file for bankruptcy would have been laughable a few years ago,” said Lynn Hiestand, a partner specializing in restructuring with Skadden, Arps, Slate, Meagher & Flom LLP.
Bondholders are owed about $22.76 billion, the affiliate filing said. The United Auto Workers are owed about $20.56 billion, excluding “approximately $9.4 billion corresponding to the GM Internal VEBA,” the filing said.
“GM going through bankruptcy is a very positive thing for the auto industry: They should emerge as a reasonable competitor,” said Len Blum, managing director at investment- banking firm Westwood Capital LLC in New York. “The only thing that’s been holding GM back is labor contracts and relationships with debtors and franchisees. All that should be cleansed in a bankruptcy.”
GM Shares
GM plunged 33 percent to 75 cents on May 29, the lowest level in 76 years, and less than the $1 minimum price normally needed for a New York Stock Exchange listing. The stock was valued above $40 less than two years ago. GM shares traded in Germany fell 19 percent to the equivalent of 65 cents as of 10:16 a.m. in Frankfurt.
GM intends to close 11 factories and idle an additional three, while attempting to reopen one idled facility to build a new small car, the administration said, without estimating how many jobs would be eliminated. The automaker has said it aims to reduce its U.S. hourly workforce to about 40,000 next year from 61,000 at the end of last year.
The company has lost almost $88 billion since 2004.
The government is “a reluctant equity owner” that “will protect the taxpayers’ investment by managing its ownership stake in a hands-off commercial manner,” the Obama administration said yesterday in a “statement of principles” for its management of private firms.
Ousting Wagoner
President Barack Obama’s administration finds itself in control of an icon of American industry after rejecting a recovery plan filed in February and ousting Chief Executive Officer Rick Wagoner.
The terms of the filing were hammered out by a government task force led by Quadrangle Group LLC co-founder Steven Rattner, which demanded concessions by the company, the United Auto Workers and bondholders.
“The resulting agreement is tough but fair,” the administration said in the statement.
The administration expects the new GM to emerge from bankruptcy in 60 to 90 days, said administration officials, who asked not to be identified in advance of the filing, on a conference call yesterday with reporters.
New Leadership
The U.S. Treasury and GM prepared the way for the bankruptcy filing by getting 54 percent of bondholders to agree to the revised reorganization plan, bondholder representatives said yesterday. GM also got approval in the past week from the United Auto Workers union for an agreement that may save the company $1.3 billion annually.
The process for picking the new board majority is already under way, as chief executives, former chief executives and people with business experience are being examined, one of the Obama administration officials said. The new members will join the revamped company as GM’s desirable assets emerge from bankruptcy, one of the officials said.
GM, which has already received $19.8 billion in U.S. Treasury loans, will be the largest manufacturer to file for bankruptcy, surpassing Chrysler LLC. A bankruptcy judge would supervise the sale or liquidation of unprofitable brands, such as Saturn and Hummer, and the 14 factories that would be closed or idled.
The new GM would emerge armed with vehicles from its Cadillac, Chevrolet, Buick and GMC units. It will be built to survive in a market of 10 million annual U.S. car sales, down from 16 million, the Obama administration said.
United Auto Workers
New cars and light trucks probably sold at an annual rate of 9.9 million vehicles in April, based on the average of 7 analyst estimates compiled by Bloomberg. Sales totaled 13.2 million in 2008 and averaged 16.8 million this decade through 2007.
The UAW health trust fund for retirees, which is owed $20 billion by GM, will be replaced by a new entity that will own 17.5 percent of the new company with warrants to purchase an additional 2.5 percent. Bondholders and other creditors would get a 10 percent stake in the new GM, with warrants for an additional 15 percent, in exchange for $27.1 billion unsecured debt.
Administration officials said GM will have to comply with executive compensation limits the Treasury announced in February for financial institutions that receive more than $500 million in federal funds, as well as the so-called Dodd Amendment. The provision is named after Senate Banking Committee Chairman Chris Dodd, a Connecticut Democrat, who attached the pay restrictions to the $787 billion economic stimulus bill Congress passed on Feb. 13.
Those restrictions place a $500,000 salary cap on the top five executives at banks, and the 20 most highly paid employees below them, and require them to forgo cash bonuses.
To contact the reporters on this story: John Hughes in Washington at jhughes5@bloomberg.net; Caroline Salas in New York at csalas1@bloomberg.net; Jeff Green in Southfield, Michigan, at jgreen16@bloomberg.net; Bob Van Voris in New York at rvanvoris@bloomberg.net.
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