GM kneels before bankruptcy court

Bloomberg

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General Motors, the world’s largest carmaker until its 77-year reign ended last year, filed for bankruptcy protection in the U.S. on Monday, with a plan to create a 21st-century company that can compete in world markets.

The U.S. government will bankroll the transformation of the 100-year-old automaker, a victim of tumbling sales and higher gas prices. The government plans to convert much of its $50 billion of loans to a 60 percent stake in the new entity, senior administration officials said Sunday.

Monday’s filing coincides with a deadline for GM to convince a government auto task force that it could reorganize out of court through debt and cost cutting. "It’s been a long time coming, but the reality of a GM bankruptcy is still a bitter pill to swallow - it’s a bit like the Titanic sinking," said Stephen Pope, chief global strategist at Cantor Fitzgerald in London. "This is a step they should have taken more than a year ago, which could have put them in much better shape before the economy went down."

Largest bankruptcy ever

Detroit-based GM is the largest manufacturer to file for bankruptcy, surpassing Chrysler. The carmaker plans to launch a new company in 60 to 90 days, armed with vehicles from its Cadillac, Chevrolet, Buick and GMC units for the U.S. market. A federal bankruptcy judge would supervise the sale or liquidation of unprofitable brands, such as Saturn and Hummer, and at least 11 unwanted factories. One idle GM facility in the U.S. will be retooled to make small, fuel-efficient cars as part of an agreement with union workers, GM said May 29.

GM’s Saab unit is in bankruptcy in Sweden. The German government picked Magna International, a Canadian car-parts maker, to buy GM’s Opel unit.

Seasonally adjusted auto sales in the United States tumbled to 9.2 million last month from 14.2 million a year earlier, based on seven analysts surveyed by Bloomberg. Chrysler may have fallen 51 percent and General Motors may have fallen 37 percent, according to five analysts. May sales at that rate would mark a fifth straight month at fewer than 10 million units, the deepest slump in 33 years of Bloomberg data. U.S. joblessness at the highest since 1983, Chrysler’s Chapter 11 case and GM’s filing all likely helped keep buyers out of showrooms.

"It’s still a rough road out there," said Jeff Schuster, an automotive sales analyst with J.D. Power & Associates in Troy, Michigan. "There’re still a lot of issues with the economy and a lot of uncertainty in consumers’ minds."

GM, the biggest U.S. automaker, and No. 3 Chrysler began receiving emergency federal loans in December while they worked to restructure outside of court. Chrysler filed for bankruptcy on April 30.

The industry sales rate has been little changed since January "probably because of uncertainty caused by Chrysler and GM bankruptcies," said Jesse Toprak, director of industry analysis for auto-research firm Edmunds.com. "After the dust settles, we’ll probably see sales improving to above 10 million." While an improvement over the first five months of 2009, that rate still would be less than 2008’s 13.2 million U.S. sales and the average of 16.8 million this decade through 2007.

Ford Motor, the only U.S. automaker to shun a federal bailout, probably posted a 29 percent drop in sales, helping it increase market share, according to five analysts.

A late-month sales jump may push the industry rate to almost 10 million units or even more, said George Pipas, the sales analyst for Ford. "In the last week, things have changed," he said. "We expect to see a sales rate that is higher than we’ve seen in the last four months."

Nissan Motor may have fared best among Japanese firms, falling 37 percent, compared with 40 percent for Toyota Motor and 38 percent for Honda, according to three analysts.

Hyundai Motor, South Korea’s largest automaker, may have dropped 15 percent, according to Edmunds.com. Incentive spending and Hyundai’s image as a value brand probably helped blunt the decline, Toprak said.

The GM case was assigned to U.S. Bankruptcy Judge Robert Gerber, who also presides over the bankruptcies of Lyondell Chemical and BearingPoint. He also presided over the bankruptcy of Adelphia Communications.

GM listed in its petition as its top creditors Wilmington Trust, representing bondholders owed $22.8 billion; International Union; the United Automobile, Aerospace and Agricultural Implement Workers of America, owed $20.6 billion; and Deutsche Bank, owed $4.44 billion. One idle GM facility in the U.S. will be retooled to make small cars as part of an agreement with union workers, GM said May 29.

The filing makes GM the third-largest bankruptcy in U.S. history, ranked by total assets, after Lehman Brothers and WorldCom. Chrysler’s April 30 filing listed $39 billion in assets.