GM in 'intense' preparations for bankruptcy

General Motors (GM) is making "intense" and "earnest" preparations for bankruptcy, which is now seen as the best option, according to a source familiar with the company's plans. The company is operating under a June deadline from the U.S. Treasury to reduce debt and slash costs as part of its $13.4 billion loan and request for an additional $16.6 billion.
It appears the plan to split the company in two is gaining momentum. Known as a "363 sale" because of the relevant section of the Chapter 11 bankruptcy code, this would see GM divided into one company containing healthy brands like Chevrolet and Cadillac and another holding troubled units like Saturn.
Officially, GM continues to work toward an out-of-court restructuring, which is something Ford (F) has been making great progress on. The catalyst for the apparent change of heart is the ongoing difficultly new chief executive Fritz Henderson and his counterparts at Chrysler are having negotiating with bondholders and the labor union. Creditors are holding out for better terms, secure in the belief that a sympathetic Obama administration won't allow a bankruptcy judge to force unattractive terms on the United Auto Workers. Moreover, these secured debt holders have rights to factories and other assets should their stonewalling force a full liquidation.
It is likely that Tuesday's revelations are nothing more than theatrics designed to shake up bondholders -- many of which are recipients of the government's financial rescue money. Currently, GM maintains $62 billion in debt and is looking to cut this down to more manageable levels by slashing commitments to a health benefits fund for retirees ($20.4 billion) and by convincing bondholders to accept a debt-for-equity swap ($27.5 billion).
Discussions hinge on the size and terms of the debt swap and the depth of job cuts. Last month, GM offered bondholders 8 cents on the dollar in cash, 16 cents in new unsecured debt, and a 90% equity stake in the company, according to Reuters. This is a sweeter deal than the one Ford's senior convertible debt holders agreed to.
Previous concessions by the union, including the jobs bank program that paid for idled workers, will help save about $1.1 billion. But these reductions were made with an eye toward profitability at an industrywide annual production rate of 11.5 million cars and trucks. Things have slowed significantly since then: March deliveries clocked in at an annual rate of just 9.9 million vehicles. To survive in this environment, deeper cuts are needed. A recent proposal targeted 47,000 jobs this year, the closure of five U.S. assembly plants, and the elimination of thousands of dealerships.
If there is a silver lining to this story (although it doesn't seem like one to me), it is that the lawyers at Weil Gotshal & Manges are set to earn an estimated $230 million in legal fees should GM file for bankruptcy protection. This will set a new record, surpassing the $209 million the firm earned by guiding Lehman Bros. through the largest bankruptcy filing in U.S. history. Overall, it is estimated that a GM filing would generate $1.2 billion for all types of service professionals, including bankers and accountants.

Anthony Mirhaydari is a contributor to the Strategic Advantage investment newsletter.