Bankruptcy, The Bumpy Or Smooth Road

8th June 09 - Bankruptcy, the bumpy or smooth road

If the market for your products falls by 40% to 50%, and suddenly as distinct from gradually, it is hard to survive even if the balance sheet at the pre-stage is strong. When it isn’t, the road to bankruptcy looms. So it is then for the automobile industry, whether cars, vans or trucks. There is a touch of irony in that on a single day, three major events are occurring. Honda workers at the Swindon plant in the UK have returned to work on a beautiful spring morning with a spring in their step having taken four months off to garden and paint the house. It is true that some 1,300 have lost their jobs and the remaining 3,500 or so have taken a 3% (5% for managers) pay cut but nevertheless, the production lines roll again for the small and efficient Civic model with all that Jazz to come in the autumn.

Concurrently, a bankruptcy judge over the pond has decided that Chrysler can sell the bulk of its operations to Italy’s Fiat (diaried earlier) and so arrive after a rather bumpy ride through Chapter 11 bankruptcy. Thirdly, is the big one. In the diary entry of 5th June 09, the likely outcome of splitting off the European end of General Motors (GM) was detailed, bearing in mind that the UK Vauxhall marquee is at risk. Now for the iconic US main business of GM. A filing is being made under Chapter 11 bankruptcy protection in a court in the Southern District of New York. It will be the largest industrial bankruptcy in US history. $82bn of assets are lined up against $172bn of liabilities. The arithmetic is not difficult. Whatever happens from this point, ordinary shareholders will get nothing.

The idea is simple, the numbers staggering. All US auto plants will close (47) for the bankruptcy process duration of about three months. A slimmed down meaner machine will emerge. Emerge from what? More than 20,000 North American factory workers and 8,000 white-collar jobs will disappear, more than a third of 6,000 dealerships will close along with 14 factories across the US and Canada. It is being reported that the US government’s total financial commitment to GM is of the order of $60bn and for that it will get 60.8% of the new company. The Canadian government will receive 11.7%. The United Auto Workers union will receive a 17.5% stake as compensation for reduced payments to a healthcare trust to cover 460,000 retired workers. Over time, bondholders will be able to expand their initial 10% shareholding by a further 15% out of the government’s holding.

GM’s drive through bankruptcy looks to be smoother than that of Chrysler but it is a sad day for what was, until just one year ago, the largest car manufacturer in the world. The future is small fuel efficient autos with at least one new plant being tooled for a car that might well have been made in China were it not for this great pressure for change.