Growing Talk That Bankruptcy Is The End-Game For General Motors (GM)

There is growing talk this morning that the end-game for General Motors (NYSE: GM) will be a quick, negotiated bankruptcy. The Obama administration is also prepared to let Chrysler LLC go bankrupt if a deal with Fiat SpA cannot be reached.

GM has 60 days to come up with a more aggressive restructuring plan and a credible strategy to implement the plan, after the plan they submitted was rejected by the Obama administration for being not strong enough to justify additional taxpayer investment. The Administration indicated that the best chance at success may well require utilizing the bankruptcy code in a "quick and surgical way."

The Obama administration maintains that their position hasn't changed, saying they remain committed to a significant restructuring without a bankruptcy but that is not the vibe coming out of Washington. Members of Congress suggest it is increasingly likely that General Motors will go bankrupt.

The talk of a likely bankruptcy for GM could be a tactic to push bondholders and the union to come up with significant concessions to make the company viable. GM needs to significantly reduce its massive debt in an debt-for-equity exchange with bondholders and also must reduce its $20.4 billion obligations to a union-run health-care fund. A bankruptcy could make recoveries for bondholders and the UAW even more difficult, so the threat of bankruptcy could force them to the table.

An analyst at Deutsche Bank believe that the restructuring of GM could be accomplished under Section 363 of the bankruptcy code, which in effect would split the company into "good" and "bad" parts. Commenting on this the firm said, "This would involve the purchase of assets from the bankrupt company (by the government), and placement of those assets into a “Newco”, on relatively short notice. The Newco could be sized appropriately (i.e. fewer brands, lower market share, and lower liabilities) to meet a wide range of assumptions. In this case, the purchaser would have the ability to pay suppliers. And it would have the ability to forge a new collective bargaining agreement with the UAW."

Deutsche Bank continues to believe that GM's equity could have a "zero" value and said beneficiaries could include Ford (NYSE: F), and suppliers disproportionately exposed to GM/Chrysler competitors.

UPDATE: shares of GM are currently down more than 10% on today's bankruptcy chatter. The stock most recently traded at $1.73.

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