A corporate bankruptcy attorney provides a preview of what a Chapter 11 filing by General Motors might work itself out.
First, there’s a very simple reason why the non-bankruptcy solutions being contemplated won’t work:
A lender to an insolvent company on the verge of bankruptcy wants its loan to be repaid. It would not allow loan proceeds be used to pay off existing liabilities. GM owes unsecured bondholders about $40b. There is no indication that bondholders have agreed to standstill, waive interest payments, or restructure the debt. GM’s Series D debt of $800m comes due in June 2009, when GM must pay the debt, default or get bondholders to extend the maturity date. GM owes trade creditors about $28b and owes another $34b in accrued expenses.
GM’s legal obligations to bondholders and trade creditors cannot be changed or modified without a bankruptcy case, or the written consent of each individual creditor, That’s a near impossible task. Attempting to reorganize GM outside of a legal proceeding would encourage creditors to holdouts for special treatment, delaying any chance at restructuring
A commercial lender supporting GM– which is insolvent on the basis of its balance sheet– would ask how paying the existing claims of bondholders and suppliers will help GM with its current cash flow problems. They would not allow loan proceeds to be diverted to unsecured creditors. Without a Chapter 11 case, taxpayer loans to GM could be used to pay interest on $40b of GM unsecured debt, and to pay the $800m Series D debt coming due in June 2009.
GM must also pay $7.5b to the retiree trust in January 2010,– another liability for which it does not have funds. Taxpayer money should not be used to bailout existing debt or to pay non-essential existing liabilities.
The rest of the article is fairly informative, and well worth a read since it’s most likely a projection of what we’ll see play out in 2009 and beyond.