General Motors is said to be in “intense” and “earnest” preparations for a possible bankruptcy filing, according to a new report. GM shares closed at $2.00 Tuesday evening, down 12 percent on the news. The possible bankruptcy strategy includes a plan to split the corporation into two separate entities.
If GM proceeds with the strategy, a new company will be formed from the most successful units, including Chevrolet and Cadillac . The “new” GM will inherit some secured creditor debt, a source told Reuters. Bondholders are expected to lose a substantial amount of money, and dealer, union, and supplier obligations could be severed, another source told the news agency. The “old” GM — consisting of defunct brands and bad debt — would likely be liquidated.
There is speculation a bankruptcy filing might be the only solution to GM’s woes. The U.S. government has given the company just 60 days to restructure outside of bankruptcy court — an a monumental task to say the least. The Obama Administration has told GM it must cut unsecured debt by two-thirds, convert half its remaining payments into a union healthcare trust to equity rather than cash, and reduce hourly wages and benefits to match Asian carmakers.
On Monday, Moody’s Investor Service released a report indicating a 70 percent risk of bankruptcy for GM and Chrysler . GM CEO Fritz Henderson said he hopes to restructure outside of bankruptcy court, but he is fully prepared to take the company into Chapter 11 if the necessary deals cannot be reached.
