GM Bankruptcy Closer But Unwanted, New CEO Says

In his first press conference since the auto task force pushed Rick Wagoner aside, Henderson says the message from Washington is “go deeper, go harder, go faster” with the restructuring plan.

General Motors Corp.’s new CEO Fritz Henderson admits chances of bankruptcy are more likely, as a plan for the auto maker laid out yesterday by President Obama and his auto industry task force allows for an unobstructed path to Chapter 11 proceedings.

Henderson also indicates the possibility of further job cuts, plant closings and possibly more brand shutdowns.

In his first press conference since the auto task force pushed former Chairman and CEO Rick Wagoner aside over the weekend, while also rejecting GM’s viability plan, Henderson says the message from Washington is “go deeper, go harder, go faster” with the restructuring plan.

“We got it; we know exactly what that means,” says Henderson, a Detroit native and 25-year GM veteran who has held the posts of company president, chief operating officer, vice chairman, chief financial officer and also run international units at the auto maker.

“We need to do more, we need to do it faster,” he says, calling the auto maker’s viability plan panned by the White House yesterday, “a down payment” on the accelerated restructuring GM must accomplish within 60 days or face bankruptcy.

Much of the restructuring GM contemplated in its latest but unreleased viability plan runs into 2014. But the White House says the slow pace “undermines (GM’s) ability to compete against large, highly capable and well-funded competitors.” In short, GM’s business plan was “too optimistic.”

Henderson today outlines key items that must be attacked more deeply and with greater urgency. Most importantly, GM must clean up its heavily leveraged balance sheet chiefly by getting the United Auto Workers union to take equity in GM, instead of cash, as payment into a health-care trust the auto maker agreed to seed during 2007 contract negotiations.

At the same time, bondholders must accept much less for the roughly $28 billion in GM than the paper currently trades.

While the union and the bondholders both say neither side has conceded enough, without the two sides coming together soon, GM almost certainly enters bankruptcy.

“The truth is, as of March 31, we had not accomplished what we set out to do in terms of having launched a bond exchange or renegotiating those (labor) provisions,” Henderson says. “The deal is you need to do that and more to deleverage the balance sheet.”

GM must craft its business plan taking into account the starker realities of today’s market. The auto maker expected industry sales this year of 10.5 million units on a seasonally annualized basis, a figure it dialed down in January from a Dec. 2 estimate of 12 million units. But through February, the industry was selling at just 9.3 million, according to a Ward’s data.

GM also needs to more closely consider the direction of tomorrow’s marketplace, Henderson says. “It’s quite clear to us what needs to be done to meet this task.”

That includes making broader operational changes. “We have a good down payment against that now. We need to ask how do we go deeper and how do we go faster.”

Finally, GM must increase its revenue to make the necessary investments in product development to remain competitive. The government suggested yesterday the auto maker was “a generation” behind principle rival Toyota Motor Corp. in “green powertrain development” and historically has relied too heavily on pickups and SUVs for profits.

“We can only win if we get the job done in revenue – selling great GM cars and trucks today and selling great GM cars and trucks in the future, which involves, in their judgment, making sure all of our product lines pay the rent,” Henderson says. “That requires investment, so the company must have a level of profitability and cash flow in order to be able to fund those and reinvent our product portfolio.”

Henderson says GM’s preference is to accomplish these tasks out of court, but management “will do whatever it takes” to succeed, including a risk-fraught trip through bankruptcy.

“If we’re not successful out of court, we’ll do it in court,” he says. “The message from the task force is they will help us do that in a rapid way. We (have) already been doing contingency planning in this regard.

“Any student of the bankruptcy process would understand the general rule is you spend a long time in there, and there is a lot of value destruction when you go through the process. This is about, if we resort to it, how do we get in and get out fast.”

Obama says a bankruptcy at GM would not follow a typical Chapter 11 proceeding.

“When people hear the word bankruptcy, it can be unsettling,” the president said Monday. “What I’m talking about is using our existing legal structure as a tool that, with the backing of the U.S. government, can make it easier for GM and Chrysler to quickly clear away old debts that are weighing them down so that they can get back on their feet and on a path to success.

“A tool we can use even as workers stay on the job building cars that are being sold,” he added. “What I’m not talking about is a process where a company is broken up, sold off and no longer exists. And what I’m not talking about is a company that is stuck in court for years unable to get out.”

Erich Merkle, an independent industry analyst in Grand Rapids, MI, remains skeptical about GM’s chances in Chapter 11. “I am very worried,” he tells Ward’s.

“Bankruptcy for GM would be a very hard landing and lead to long legal battles. This surgical bankruptcy they talk about is ridiculous. GM’s sales would probably fade to a point where government support cannot keep them from liquidation.”

Obama also announced Monday the government would stand behind service contracts and warranties on existing and newly purchased GM products. And GM today launches a marketing plan that includes protection for customers in case the value of their newly purchased GM vehicle plummets down the road.

“The premise is no one is going to buy a car from a bankrupt company,” offers Douglas Bernstein, a managing partner in the bankruptcy unit of Plunkett Cooney PC in Bloomfield Hills, MI. “Does that mean anyone would be more inclined to buy now? You still have this massive credit-availability problem.”

Bernstein thinks Chapter 11 may represent the only avenue for GM, since the UAW and the company’s bondholders are not bound by the firm guidelines of a bankruptcy proceeding.

“Today, a GM bankruptcy seems more likely than not, but the rules keep changing,” he says, such as the government giving GM an additional 60 days to get the UAW and bondholders to agree. “If GM goes into bankruptcy, at least you know what the rules are.”

Meanwhile, Henderson says more plant closings could be coming. The auto maker recently decided to increase the number of North American facilities it would close to 14 from nine last year. “I would expect we need to take further measures,” he tells the media this morning.

Additional job losses also seem likely. Henderson says the auto maker could “sit down” with the UAW to discuss another blue-collar attrition program after the viability is redrafted. “It is both likely and probably something the UAW would want us to consider.”

GM’s latest hourly attrition program drew 7,500 takers, bringing the number of blue-collar job cuts in the last two years to an estimated 60,500 positions.

Henderson declines to speculate on whether GM may trim additional brands. The auto maker earlier pledged to close or sell as soon as possible its Saturn, Saab and Hummer brands to bring its lineup down to four core divisions: Chevrolet, Cadillac, Buick and GMC.

But the weakness of GM’s viability plan has led to speculation the auto maker could hold onto Chevrolet and Cadillac and sell off or wind down parts of the Buick-Pontiac-GMC channel.

“We’re going to focus on four core brands,” Henderson says. “In terms of what might happen in bankruptcy, it would not be appropriate to comment on what that might be at this point.

“I think we would need to over time, if we went through a bankruptcy, decide what are our relationships we have going forward and what are the relationship we won’t have going forward,” he says. “But in terms of focusing on brands, (that) is exactly what we plan to do and we’re going to execute to it now.”

Henderson also hoped to announce a resolution on the sale of Hummer today, but says the auto maker continues to work with interested parties and likely will have a decision “within weeks.”

The Saturn issue has no immediate timetable, and Henderson says GM continues to work with the brand’s franchise team on options. If a solution for Saturn is not reached, GM still intends to wind it down following the ’11 model year. No mention was made of Saab, currently under reorganization in Sweden.

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