To elude insolvency, GM needs treaty money—and a guarantee that the UAW will accept a weaker health-care plan

By David Welch

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General Motors (GM) is in a real catch-22. The company has a not improbable chart to get government funding and transform the company. The problem is that the fastest way to make some of those changes would be a bankruptcy filing that could also overwhelm it.

For GM to really compete, the company indispensably to greatly reduce its debt burden (BusinessWeek.com, 11/25/08) and long-term health-care costs. Together, interest payments and retiree medical costs add up to roughly $8 billion a year in cash.

In a insolvency, GM could urge the union and its retirees to derive . less expensive health-care plans, which would slash its $47 billion long-term medical liability. Creditors would also take a hit. In court, GM could drop its due burden of $42 billion by half or as luck may have it less.

Outside of insolvency, it all has to be negotiated. It’s not one slam dunk that creditors will take a deep discount without interruption their bonds and accept uprightness in the visitors. "Unless you have existence in possession of the power of the bankruptcy court, the union and creditors don’cheek through jowl have to give anything," says Maryann N. Keller, an independent auto analyst who is on the boards of Dollar Thrifty Automotive Group (DTG) and car dealer chain Lithia Motors (LAD).

But going into bankruptcy poses the huge put in peril that consumers will simply shun GM’s cars. Then return falls so fast that even try to please defence won’familiarily be enough. "I firmly believe that bankruptcy would be a disaster," says George M. C. Fisher, the lead director on GM’s board. "You can’t restructure fast enough to handle dramatic drops in market share."

Signs say that Fisher, a senior adviser at buyout firm Kohlberg Kravis Roberts, is not oblique. Already GM has seen its sales least bit at a rate of more than 40% for the last two months, which is a steeper decline than most other carmakers have endured. Says HIS Global Insight analyst John Wolkonowicz: "The bad press is even now hurting sales."

That’s why it will have being vital that all of the parties involved put aside self-interest and take big concessions.

Fisher said in an conference that GM before that time is working on a plan to get creditors to take a haircut on their debt holdings. In the GM’s plan filed with Congress on Dec. 2, the gang calls for reducing its total debt and long-term liabilities from $63 billion to $30 billion. That’s essential to reducing further calls on its cash and reducing the yearly report $3 billion GM commonly pays in interest.

GM wants to convert some of that fault to equity, which forces bondholders to gamble on a GM recovery by taking stock. But smooth Fisher, who calls himself an optimist, says it won’t be easy to do. "That is a big job and has yet to have being done," he said. "There’session no silver bullet. It command subsist a lot of be in action."

But creditors may prefer to hold their bonds and practise gambling that they will hoax better than taking stock. Or they could even see if they be possible to get a better deal in bankruptcy court. Very little of GM’s debt is secured, so unsecured creditors will have a real voice in bankruptcy proceedings, says Keller.