November 20, 2008
GM Prepack?
Posted by Fred Tung

As the Big Three automakers' pleas for emergency bailout money appear to have fallen on deaf ears on Capitol Hill, the blogosphere is awash with discussion of bankruptcy scenarios (see, e.g., here, here, and here).  "Prepackaged" bankruptcy in particular seems to be a popular solution (see here and here).  But I find it hard to see how a prepack would work here.  Unlike a standard Chapter 11 filing, a prepack is a bankruptcy filing where the debtor and its major constituents--in this case, bondholders, banks, employees, unions, management, dealers (have I left anyone out?)--already have a deal worked out before they file.  Instead of negotiating in Chapter 11 (i.e., after the Chapter 11 filing), management and the major constituents work out the company's financial restructuring, new finaCar9ncing, and anticipated operational changes beforehand, and when they file for bankruptcy, they include not just the bankruptcy petition, but also the plan of reorganization and all the creditor consents required to confirm the plan.

Just judging from what I read in the paper, it is not apparent that the Big Three have had any discussions with their banks or bondholders or dealers about how to share the pain of a restructuring, or who would provide financing in bankruptcy.  Now, this may be just posturing on the part of companies.  They seem to be playing chicken with Congress, on the "too-big-to-fail" theory.  Needless to say, that's a dangerous game.  Especially during the interregnum, the specter of political gridlock looms large.

There may just be some usage issues here:  when commentators say "prepackaged," they might instead mean some kind of bankruptcy filing with strong government involvement.  For example, the government could offer bankruptcy financing conditioned on specific operational and managerial changes.  Not a bad idea.  But that's not a prepack.

Bankruptcy, Current Affairs, Employees, Financial Crisis | Bookmark

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