U.S. Squeezes Auto Creditors

Treasury Seeks Billions in Concessions for GM and Chrysler From Banks, Bondholders By JOHN D. STOLL, JEFFREY MCCRACKEN and KATE LINEBAUGH The federal government is taking an increasingly hard line with the creditors of General Motors Corp. and Chrysler LLC, trying to squeeze billions of dollars in concessions out of banks, bondholders and others. In both cases, the U.S. is directly and not-so-directly managing negotiations for the car companies as they prepare for what could be Chapter 11 bankruptcy filings. Chrysler has been told by the Treasury Department to get a deal done with creditors by the end of April, while GM has until the end of May. A Treasury spokeswoman declined to comment on dealings with GM and Chrysler debtholders. GM's restructuring could play out in one of two ways. It could successfully negotiate cost-cutting concessions with unions and bondholders so it can become viable outside of bankruptcy. Or, in the more likely scenario, it will reorganize by filing for Chapter 11, said people familiar with the situation. Toyota Plans a Major Overhaul in U.S.Auto-Dealer Ranks Dwindled in First QuarterThe Treasury Department is pushing GM to offer its bondholders, who are owed $29 billion, a small portion of shares in the company. That's a sharp cut from a bond-exchange offer GM made two weeks ago, which included about $8.5 billion in cash and new debt in the company as well as 90% of GM's stock, said people familiar with the terms. The Treasury, which has pumped $13.4 billion into GM to keep it afloat, believed the earlier plan was too generous to bondholders, said people familiar with the matter. The new debt-exchange offer, which could be presented as soon as next week, is sure to face strong resistance from bondholders. But the offer may be a last chance at avoiding bankruptcy, which GM worries would be more expensive and disruptive than an out-of-court solution. President Barack Obama's auto task force, meantime, has made it "crystal clear" that its members think a managed, or "prepackaged," bankruptcy is GM's best option, but it is letting GM pursue the out-of-court option for now, said people familiar with the matter. Many of GM's bigger bondholders prefer to negotiate outside of court, said people involved, but have been frustrated by a lack of engagement by the government and GM. These bondholders also are raising concerns that the bankruptcy revamp GM is considering may be unfair to investors and unions, said these people. The plan would split the company into a "New GM" containing its desirable assets, such as Chevrolet and Cadillac, and an "Old GM" holding troubled brands such as Saturn and the auto giant's union health-care liabilities. Treasury officials, many of whom are now working on GM's restructuring from an office in Detroit, plan to meet in coming days with a committee representing GM's bondholders. Getty Images Chrysler has been told by the Treasury Department to get a deal done with creditors by the end of April. Above, Chrysler Vice Chairman Jim Press unveils a remodeled Jeep Grand Cherokee at the New York auto show on Wednesday The bondholders likely will struggle to figure out how to value the latest debt-exchange offer, said a person familiar with the matter, because it isn't clear what the government will do about the $13.4 billion it has lent GM. In a bankruptcy scenario, the government could reduce its debt in the company by transferring some or all of it to the "Old GM," said this person. If the government agreed to reduce its debt outside of bankruptcy, that likely would make GM shares worth more. That could sweeten the new bond-exchange offer. Such a move also could make the United Auto Workers union more favorable to a new health-care deal with GM, another requirement of the Treasury. The UAW has been largely unwilling to negotiate with GM until it sees what concessions will be made by bondholders and others. The standoff between bondholders and the UAW underscores the difficulty surrounding GM's attempt to reorganize without the coercion of bankruptcy. Key players in the Obama administration are pointing to the lack of progress as a reason that bankruptcy could be unavoidable. At Chrysler, the U.S. wants banks and investors who control its bank debt to give up about 85% of the nearly $7 billion they are owed. In bankruptcies, such senior secured lenders typically get most of their money back. Some senior lenders believe they would get more than 70 cents for each dollar of their secured loans if Chrysler is broken up and sold under bankruptcy, said people familiar with the talks. Other lenders don't have an exact number nailed down and are awaiting detailed figures from the auto maker on its assets. All of the 40-plus lenders and investors are nonetheless incensed by the last Treasury offer: that they accept about 15 cents per dollar of face value of their loans. Secured lenders -- those whose loans are backed by the rights to Chrysler assets should the company default -- haven't made a counteroffer to the Treasury, but one is forthcoming, say these people. The lenders have now added the hedge fund Elliott Management to their negotiating team, which also includes Chrysler's four largest bank debtholders: J.P. Morgan Chase & Co., Citigroup Inc., Goldman Sachs Group Inc. and Morgan Stanley. Those four banks hold about $4.3 billion of the bank debt, said people familiar with the situation. Elliott Management is also a large holder of Chrysler bank debt, which it bought on the secondary market. In a statement Thursday, a steering committee representing secured lenders, including the four big banks and Elliott Management, said: "We are engaged in ongoing discussions with the U.S. Treasury and Chrysler, and continue to work diligently toward achieving a thoughtful solution prior to the April 30th deadline." The lenders' steering committee held a conference call with lenders on Monday to update them on the Treasury offer, which one Chrysler debtholder called "ugly, really a pretty low starting point." Chrysler, which is controlled by Cerberus Capital Management LP, has estimated that if it liquidates, the amount its senior secured lenders would see is between 11 cents and 43 cents on the dollar, according to the viability plan it submitted to the government in February. With Chrysler bank debt trading at around 12 cents on the dollar, the government view has been, "Why offer more than 15 cents?" said a person involved in the talks. But some of the senior secured lenders think that is a low-ball estimate and say recoveries could reach 70 cents on the dollar in liquidation, said another person familiar with the talks. Chrysler said in its February plan that the company had identified $1 billion worth of noncore assets that could be sold and had sold $700 million of those assets, such as its California design center. In addition, the lenders say there is value in Chrysler's Jeep brand. Aside from vehicle sales, the brand generates $500 million a year in royalty revenue for use of its name on everything from bicycles to strollers. It is the value of Chrysler in liquidation that prompted some of the secured lenders to buy the company's debt. These lenders are distressed-asset buyers and hedge funds that haven't received federal assistance. But the largest portion of the company's debt is held by banks that have received federal aid, including J.P. Morgan, Citigroup, Goldman Sachs and Morgan Stanley. Michigan Gov. Jennifer Granholm and one of the state's congressmen have suggested lenders that received funds under the Troubled Asset Relief Program should have to write off their debt to ensure the future of Chrysler. —Sharon Terlep contributed to this article. Write to John D. Stoll at john.stoll@wsj.com, Jeffrey McCracken at jeff.mccracken@wsj.com and Kate Linebaugh at kate.linebaugh@wsj.com