Detroit's Big Three Just Haven't Done the Work Needed for a Prepackaged - or Even Prenegotiated - Bankruptcy
Unless you've been living under a rock for the last few weeks, you are all too painfully aware that General Motors, Chrysler Corporation -- and to a lesser, but still significant extent, Ford Motor Company --- are in DEEP DEEP TROUBLE. And that like any other red-blooded American when the "going gets tough", they are looking to the government to make it all better... or else.... >>> well, no one really wants to find out if it really would be the end of American prosperity as we know it.
General Motors has even established a website called GM Facts and Fiction to present its position.
The New York Times Live Blog summary of last week's hearings on Capital Hill as they were occurring is well worth a click for Thursday's Senate Banking Committee proceedings and here for Friday's House Financial Services Committee hearing.
Problem Solved? Based on the most recent news reports, it sounds as if the Big Three Detroit automakers may have managed to stave off the day of reckoning for at least a while. Apparently, Congress has decided to give them the proverbial "half a loaf" by allowing $$ already ticketed their way to assist in the development of more fuel efficient vehicles to be utilized more generally. (Click here for the NYT perspective, here for Detroit Free Press perspective, together withn its rundown of the Sunday morning news talk shows,
Unfortunately, no one really believes that this is anything remotely approaching a permanent solution. Chrysler is already apparently hedging its best, having reportedly retained Jones Day as potential bankruptcy counsel.
SO the question remains, ultimately what should be done? Is the American automobile manufacturing industry really too big and too intrinsic a part of the overall American economy to "let" fail? Or are those who say that bankruptcy with its unique provisions is really the only true hope for a beneficial solution actually correct? A couple of my favorite quotes (and there are many) so far on this whole mess:
- Courtesy of Friday's, Grand Rapids Press in a story entitled "Hey Congress: 'Prepackaged bankruptcy' for automakers is bad idea -- and impossible" >>> "The Detroit Lions have a better chance of winning the Super Bowl than GM has of getting a prepackaged bankruptcy," said John Wykamp, a business restructuring expert at the Grand Rapids office of Crowe Horwath LLP.
- "Congress must save the industrial infrastructure that these companies control and the jobs they create…. And Congress must do all this by NOT giving GM, Ford and Chrysler the $34 billion they are asking for in "loans" (a few days ago they only wanted $25 billion; that's how stupid they are -- they don't even know how much they really need to make this month's payroll. If you or I tried to get a loan from the bank this way, not only would we be thrown out on our ear, the bank would place us on some sort of credit rating blacklist)." - Michael Moore >>> Read the WHOLE post !
Prepackaged Bankruptcy a Solution? Although a part of the answer to this question is certainly politically based, depending in part perhaps on how one views labor unions and/or "legacy costs", or one's overall philosophy on economic policy, there is also a more pragmatic element which is sometimes misunderstood or overlooked. One of the possiblities being thrown around of late is something now being referred to as a "pre-arranged bankruptcy", a variant of the "prepackaged bankruptcy" option. (For a general discussion of this variety of Chapter 11 bankruptcy and its basic operation, read my previous post "How Prepackaged Bankruptcy REALLY Works".
Prepackaged bankruptcy - that's gotta be "the ticket", the one terrific solution, for the mess America's Big three automakers find themselves in, right? And what could possibly be more interesting for business bankruptcy practitioner like myself than the ultimate Chapter 11 prepack?!!!? (Click here, here, here, and here for general discussions of the push towards the prepack option.)
The problem is - it's not. While I, like many others, found the concept initially attractive (and let's face it, downright exciting from a professional creditors' rights attorney perspective), as I've thought harder about it, I've realized it's just not the panacea we're all looking for to solve this aspect of our growing financial crisis. Some form of a a prepack still has a role to play, but it it won't be the pure form of a prepack, prenegotiated, or even pre-arranged bankruptcy; substantial government involvement will still be required to maximize the opportunities offered by the prepack option. Why?
Those jumping on the "why not bankruptcy?" bandwagon early with respect to Detroit's Big Three tended to focus on (1) the ability under the Bankruptcy Code for the automakers to rid themselves of burdensome contracts such as perhaps obligations to the autoworker unions and dealers, as well as "legacy costs" for retiree benefits; and (2) the perceived efficiency of the prepackaged bankruptcy option in comparison with the average Chapter 11 proceeding.
>>> Breaking Burdensome Contracts
As far as the ability to make changes to union collective bargaining agreements and other burdensome contracts, it is certainly true that the Bankruptcy Code has some useful provisons the auto companies might be able to utilize to their benefit. However, the full benefit of section 1113 of the Bankruptcy Code with respect to union contracts, section 1114 of the Bankruptcy Code with respect to pension and retiree benefits, and section 365 of the Bankruptcy Code would almost certainly NOT be a part of a prepack. Rather full exploitation of these provisions from the automaker perspective would almost certainly prolong any bankruptcy proceeding. At most the power of these provisions might allow the automakers to drive a harder bargain in the context of a possible prepack.
>>> Prepack Efficiencies
Although the time ACTUALLY SPENT IN BANKRUPTCY is generally less by design in prepacks, it would be fallacious to conclude that the overall time to a solution is in fact any shorter than when the more traditional Chapter 11 path is followed. Key to the success of any prepack variation is the prepetition agreement of the major players to the financial reorganization of the financially distressed company. In the case of Detroit's automakers, there are a number of different constituencies with conflicting objectives and needs who have yet to reach common agreement.
Given what appears to be an especially stubborn refusal on the part of the automakers to even remotely consider any sort of bankruptcy type scenario of any kind until quite recently, it seems unlikely that any substantial productive discussions have yet occurred with any of these crucial partners to a successful prepack. To achieve the benefit of a prepack, votes for a specifically delineated plan of reorganization have to have been successfully solicited before any filing is ever made. Because the automakers don't even have such a plan, let alone gotten the requisite buy-in, or even the beginnings of the negotiation of acceptable terms, the prepack option isn't realistically even on the table!
Recent reports suggesting some willingness on the part of union leaders to discuss union contracts and the "legacy costs" of retiree benefits is certainly a hopeful sign that the productive discussions with major stakeholders so necessary to a successful prepack may actually be beginning. But it is only a beginning and a long way from the uanimity or at the very least general agreement needed among the principal players!!
Where Things Stand. Hopefully,the brief respite Detroit's Big Three Automakers may now receive will be put to good use. What needs to happen now is for them to focus on building a specific restructuring plan and developing a strategy for obtaing the needed support from lenders, unions, and others, including Congress. Within limits - mainly relating to the likely need for involvement of the feds in some capacity with respect to some sort of postpetition DIP and exit financing -- a prepack is still a possible alternative. There's just a heckuva lot Detroit's Big Three need to do to position themselves properly to beneift from such an option.
