'Surgical’ Bankruptcy Possible for G.M. BY MICHELINE MAYNARD and MICHAEL J. de la MERCED Published: April 12, 2009 DETROIT — The Treasury Department is directing General Motors to lay the groundwork for a bankruptcy filing by a June 1 deadline, despite G.M.’s public contention that it could still reorganize outside court, people with knowledge of the plans said during the weekend. Members of President Obama’s automotive task force spent last week in meetings and on conference calls with G.M. officials and its advisers in Detroit and Washington. Those talks are expected to continue this week. The goal is to prepare for a fast “surgical” bankruptcy, the people who had been briefed on the plans said. G.M., which has been granted $13.4 billion in federal aid, insists that a quick restructuring is necessary so its image and sales are not damaged permanently. The preparations are aimed at assuring a G.M. bankruptcy filing is ready should the company be unable to reach agreement with bondholders to exchange roughly $28 billion in debt into equity in G.M. and with the United Automobile Workers union, which has balked at granting concessions without sacrifices from bondholders. President Obama, who was elected with strong backing from labor, remained concerned about potential risk to G.M.’s pension plan and wants to avoid harming workers, these people said. None of these people agreed to be identified because they were not authorized to discuss the process. G.M. declined to comment and the Treasury Department did not comment. One plan under consideration would create a new company that would buy the “good” assets of G.M. almost immediately after the carmaker files for bankruptcy. Less desirable assets, including unwanted brands, factories and health care obligations, would be left in the old company, which could be liquidated over several years. Treasury officials are examining one potential outcome in which the “good G.M.” enters and exits bankruptcy protection in as little as two weeks, using $5 billion to $7 billion in federal financing, a person who had been briefed on the prospect said last week. The rest of G.M. may require as much as $70 billion in government financing, and possibly more to resolve the health care obligations and the liquidation of the factories, according to legal experts and federal officials. Since replacing Rick Wagoner on March 31, G.M.’s chief executive, Fritz Henderson, has sent increasingly clear signals that bankruptcy is probable unless agreements are reached with labor and the bondholders by the administration’s June 1 deadline. Unlike Mr. Wagoner, who refused until his final days at G.M. to consider a Chapter 11 filing, Mr. Henderson has deployed staff to work with legal and government advisers, although he does not agree a bankruptcy is inevitable. Last week, he said G.M. was proceeding on a dual track, hoping to restructure out of court, but also preparing for a filing. “If we need to resort to bankruptcy, we have to do it quickly,” Mr. Henderson said in an interview with the Canadian Broadcasting Corporation. John Paul MacDuffie, an associate professor at the Wharton School at the University of Pennsylvania, said he saw little chance of an out-of-court restructuring, given that the Obama administration had rejected G.M.’s proposed revitalization plan in March. It was submitted without the concessions that were required from bondholders and the union, and which have still not been reached. “The simplest way to frame it is that they took the loans, there were conditions on the loans, they didn’t prove their case for financial viability, and they didn’t meet the deadline, either,” Professor MacDuffie said. Lawyers for G.M. and the government have much work to do before any bankruptcy case can begin, executives with bankruptcy experience said last week. First and foremost, G.M. would have to formulate a business plan that addresses virtually every aspect of the company that it hopes to transform while under bankruptcy protection. It would have to show how it would save billions of dollars through agreements with its bondholders and unions, how many dealers it plans to keep, and the plants and offices it plans to either close or preserve. The plan also needs to give a candid forecast of the car market, a tricky prospect given the sharp falloff in sales over the last few months, these executives said. Treasury has hired the Boston Consulting Group to help with the business plan, according to a notice posted April 8 on FedBizOpps.gov, a government procurement Web site. Participation from banks also may be needed, and because of the weak economic climate, lenders are likely to insist that G.M. wring as much out of its operations as possible. “It’s a complex system and you’ve got to be thinking big,” Professor MacDuffie said. Finally, legal experts said, G.M. would have to try to prevent panic among consumers in the event of a bankruptcy filing. The government has said it will guarantee G.M.’s vehicle warranties. Since then, G.M. has started an aggressive advertising campaign stressing that car buyers should have confidence in the company, and offering to make nine months of payments, up to $500 each, for owners who lose their jobs. One delicate issue for federal officials is the fate of G.M.’s employee pension plans, which could become the responsibility of the federal pension agency if G.M. seeks their termination. G.M. faces an unfunded liability of about $13.5 billion for its plans, which had $84.5 billion in assets and $98 billion in liabilities as of Dec. 31. That amount could sink the pension agency, requiring its own bailout before a G.M. case could be resolved. The White House has at least one option to protect the plan. The Supreme Court, in a landmark 1990 case, ordered the LTV Corporation, a steel maker, to take back responsibility for its pension plans after it emerged from bankruptcy protection. The pension agency had allowed the steel company to terminate its plans, only to see LTV negotiate a new plan with the United Steelworkers of America in which it agreed to make up a large portion of benefits that workers had lost. LTV eventually sought bankruptcy protection again and liquidated in 2002, when the federal pension agency assumed the company’s pension liabilities. While Mr. Obama’s auto task force has held only one meeting with G.M.’s bondholders — who had rejected the company’s previous reorganization plan as too onerous — it is still seeking to win union support for a swift bankruptcy, one person involved in the discussions said. But the task force is reasonably confident that its restructuring plan could still pass muster with a federal bankruptcy judge even if the union does not accede to the proposal, this person said. A creditors committee for the “new G.M.” would be formed in advance, to start working as soon as the case begins, while those with claims against G.M. would be asked by Treasury to quickly agree on terms to settle the claims. Still, if the government and G.M. cannot bring all creditors on board, they are likely to argue that creating the new G.M. is an emergency move needed to preserve the value of the carmaker’s good assets. Bankruptcy judges are given a lot of leeway to decide what is in the best interest of all parties in a bankruptcy case. Another question hanging over G.M. is the fate of Delphi, the giant supplier of auto parts that has been in bankruptcy for more than three years. Delphi, which was once owned by G.M., has been in talks with G.M., the auto task force and its lenders over its own restructuring. The administration has set an April 17 deadline for Delphi to reach an accord over G.M.’s continued support for the parts supplier, which could be pushed back as late as April 24, according to a person briefed on the matter. Should Delphi fail to reach an agreement with G.M. and the administration, it could be forced to liquidate, this person said. In that event — a prospect that the task force is preparing for — the government and G.M. may acquire some parts of Delphi’s business out of liquidation.