GM and Chrysler: Make or break week
The next few days determine if GM will go bankrupt and if Chrysler's bankruptcy plans will proceed as scheduled.
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NEW YORK (CNNMoney.com) -- The next seven days could be the most important in the history of the U.S. auto industry.
Whether or not General Motors (GM, Fortune 500) files for bankruptcy will be decided within the next few days. The nation's leading automaker faces a government mandated June 1 deadline to produce a turnaround plan or file for what would be the largest industrial bankruptcy in the nation's history.
On Wednesday morning a bankruptcy judge will hold a hearing on Chrysler LLC's plans to join with Italian automaker Fiat and emerge as a slimmed down, more competitive automaker.
And next Tuesday, all the major automakers will release their sales figures for the month of May. That will show just how willing Americans are to buy cars from automakers that are either already in, or near, bankruptcy.
Here's a day-by-day calendar of what to expect during the next week:
On Tuesday, the leadership and local presidents of the United Auto Workers union met and unanimously endorsed the tentative agreement reached last week with GM on changes to its 2007 labor deal.
A source familiar with the agreement told CNNMoney.com that the union-controlled trust fund will receive a 17.5% stake in GM as a result of the deal. But neither company nor union spokespeople are making full details of the deal public.
This is also the last day that GM bondholders, who hold $27 billion in unsecured debt from the company, can accept an offer to swap $1,000 of the debt for 225 shares of the company.
GM says it anticipates announcing how many bondholders accepted the deal on Wednesday. It must receive approval from 90% of its unsecured bondholders in order to avoid bankruptcy.
The shares would be worth about $322 based on Friday's closing price of GM. But the bondholders could be left with far less than that as GM would have to flood the market with many additional shares as part of its reorganization plan.
Standard & Poor's estimates that bondholders would recoup no more than 10% of their investment as part of the bankruptcy process. Still, it is widely assumed that bondholders both large and small will reject the offer.
Even GM CEO Fritz Henderson has repeatedly said that the difficulty of winning the approval of bondholders makes a bankruptcy filing "probable."
In addition to finding out what GM bondholders though of the company's debt-for-stock proposal, there also could be significant news on the Chrysler front.
U.S. Bankruptcy Court Judge Arthur Gonzalez is set to hold a hearing Wednesday morning on the plan to have Chrysler emerge from bankruptcy and join with Fiat.
Under the proposal, Chrysler's most valuable plants and dealerships, along with its newly revised labor contract, would be pulled out of bankruptcy and given to a new company that will be controlled by a union-controlled trust fund, the U.S. government and Fiat. The plants, dealerships, debt and other liabilities that Chrysler can no longer afford will remain in bankruptcy.
Gonzalez will need to approve the proposal in order for Chrysler to have any chance of becoming a more competitive company. The Chrysler decision will also be closely watched since its bankruptcy could wind up being a blueprint of the plan that GM hopes to follow if it files for bankruptcy as well.
Still. while the hearing is set for Wednesday, it's not clear exactly when Gonzalez will rule on the motion.
Many rank and file members of the United Auto Workers union at GM are due to vote Thursday and Friday on last week's tentative agreement. The deal allows GM to make payments due to union-controlled trust funds with its stock rather than the cash it agreed to pay in its 2007 labor deal.
Even though bankruptcy may still be inevitable regardless of what happens with this vote, the vote is important because it could allow the union members to have a new contract that survives the bankruptcy process. The UAW membership overwhelmingly ratified a deal it reached with Chrysler just hours before company filed for bankruptcy.
Thursday is also the day that many GM suppliers are expected to get about $2 billion in payments that are currently due to be paid on June 2.
GM is going to make the payments early because if it files for bankruptcy before June 2 without having made these payments, it would no longer be allowed to do so without court approval. And if those payments are delayed or not made, it could cause widespread bankruptcies and closures throughout the auto parts industry. That would disrupt production at most North American auto plants, including those owned by healthier companies such as Ford Motor (F, Fortune 500) and Toyota Motor (GM, Fortune 500).
The Treasury Department has approved the early payments to suppliers by GM. Once those payments are made, the clock will start ticking on when the company may file for bankruptcy. A filing on Friday, May 29 is a distinct possibility.
But major bankruptcy filings often occur over the weekend. That happened at both Enron and Worldcom, two of the largest bankruptcies on record, as well as at Delphi, the auto parts maker and former GM unit that has been in bankruptcy since October 2005.
If bankruptcy is avoided, it would probably be due to some last minute agreement with bondholders. But even if a deal is reached, GM might still go ahead with a bankruptcy filing because it would help GM shed up to 2,400 U.S. dealerships. That's because state franchise laws make it easier for GM to not renew contracts with dealers if it is in bankruptcy protection.
If GM makes it through the weekend without filing for bankruptcy, there is a very good chance it will do so on Monday.
In addition to being the day of the government's imposed deadline to have a turnaround plan in place, Monday is also the day GM is due to make $1 billion in interest payments to its bondholders. The company has indicated it does not have the money necessary to make those payments.
GM is also scheduled to idle three additional U.S. assembly lines on Monday through most of June and July instead of the typical two-week summer shutdown. GM already has idled 4 of 14 U.S. assembly plants.
Seven assembly lines still due to be operating next week, along with many of GM's other facilities, could be temporarily shut down next week if the company files for bankruptcy.
Chrysler was forced to shut down a number of plants on the day it filed for bankruptcy due to a cut-off in parts deliveries from suppliers. It also announced that it would cease all North American production for as long as it plans to be in bankruptcy.
The major automakers will announce their U.S. sales figures for May Tuesday afternoon and another dismal round of reports are expected. Auto industry consultant J.D. Power & Associates forecasts that industrywide sales fell 36% in the month from a year ago levels.
That would put sales just below the 900,000 level, the best figure since September. But it would still be a very weak total for May, typically a strong sales month for the industry.
"While there are some signs of stability in the automotive market, current sales rates indicate that achieving recovery will not be a quick proposition," said Gary Dilts, senior vice president of global automotive operations at J.D. Power.
Sales at Chrysler, which filed for bankruptcy court protection on April 30, will be closely scrutinized. The common assumption has been that Americans won't buy cars from a bankrupt automaker due to doubts about both resale value and warranties. But the Chrysler bankruptcy may have eliminated some potential buyers' fears that the company faced the risk of immediate closure.
In addition, the federal government has guaranteed warranties at Chrysler and GM. Chrysler also notified 800 dealers on May 14 that it intended to end its contracts with them in early June, forcing them to announce deep price cuts to try to clear out their inventory. That may have resulted in an unexpectedly strong month for Chrysler -- and that might have affected other automakers' sales.