A new article in Business Week discusses the fate of GM: The Threat of Bankruptcy
GM’s senior management, business experts, and some members of Congress think letting the automaker go Chapter 11 would be a disaster.

Bankruptcy lawyers say the automaker could benefit from a prepackaged bankruptcy, which would be a reorganization that is worked out among the automaker’s creditors before the case ever gets to a bankruptcy court judge. "It would be messy but ultimately could help the company restructure itself a lot faster," says Mark Bane, a partner at New York law firm Ropes & Gray.

The biggest obstacle to any bankruptcy is the lack of availability of debtor-in-possession (DIP) financing, which is liquidity normally provided by banks and private equity firms that a company in bankruptcy needs to reorganize itself. Indeed, the question of bankruptcy has been on the minds of GM’s top executives. On Nov. 6, GM North America President Troy Clarke told a gathering of auto suppliers that obtaining DIP financing would be "practically impossible" given the state of the credit markets and the size of GM’s obligations. "But that’s where the government could come in," says attorney Bane, "providing the liquidity GM would need to massively reorganize under Chapter 11."

The worst-case scenario for GM, say most experts, is a spontaneous Chapter 11, like the one filed by electronics retailer Circuit City (CCTYQ.PK) on Nov. 10. But a prepackaged filing could be set up to make sure that the vast majority of auto suppliers would continue to get paid on time.


Others disagree. Kimberly Rodriguez, a partner at Grant Thornton, an accounting and management consulting firm that works with auto companies and suppliers, says bankruptcy is a "last resort." Rodriguez says that in better times GM and Ford (F) have provided liquidity to its biggest suppliers who would have otherwise been forced into Chapter 11, which is very messy and destructive. "The government could play that same role for GM, and it will be a lot more orderly," says Rodriguez…

Chief among them is GM’s belief that customers who own GM vehicles, as well as those who might consider them in the near future, would flee the companies’ brands if it were in bankruptcy. In the past, when GM has been associated with the specter of a bankruptcy filing, showroom traffic drops off. During an interview with Fox Business News on Nov. 7, Wagoner said that GM’s research shows that 80% of those surveyed said they wouldn’t buy a car from a bankrupt car company. "If your revenue line falls, you would not be talking about a reorganization, you would be talking about a liquidation."  …

 See also this post on the Wall Street Journal Deal Blog.