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Monday, 1 June 2009

They don't come much bigger than this. GM Files Chapter 11

Well the waiting is finally over, once the world's biggest manufacturer, GM has finally entered insolvency protection. The yanks call it bankruptcy protection.

Like the bail-out of the banks here in the UK, the US Government will emerge as the largest stakeholder in new style GM. It will hold circa 60% of the equity and in effect underpin the future of the business. This will surely lead to other car manufacturers complaining about GM receiving subsidy, but that's for the future.

What now for the people who supply, GM, Opel and Vauxhall here in the UK?

My post on 2nd December mentioned that we had a client that supplies GM in the US and UK. They were rescued by a company voluntary arrangement earlier this year and can now SURVIVE the GM implosion, in addition (new) GM wants to continue buying their services and will probably have to pay in advance. Nevertheless, the £200k hit to cashflow and subsequent loss will certainly not help their recuperation.

If this huge insolvency impacts a business in the UK, then the board should, of course, take all such steps possible to protect their business, rapidly and with good guidance. Using any excuse to get the company restructured is fine BUT now you can blame GM. After all it was once the biggest company in the world, yet it failed.

By the way, on a related subject, the Leader Article of The Times stated Saturday 27th May, that the UK needs Chapter 11 style protection for companies. This is the old chestnut, "now there is a big recession - we need better insolvency law"! The people who write these things don't have any real understanding of UK insolvency.

We already have two excellent insolvency techniques:

Administration - this can protect a business while it is restructured, sold or placed into a

Company Voluntary Arrangement - a deal between the debtor company and its unsecured creditors to restructure and protect the business.

If insolvency practitioners, banks and directors use these techniques in an innovative way, work to achieve a consensual outcome and set out sensible proposals, then I believe we don't need any other Chapter 11 style rules.

The Government recently announced that it may improve the moratorium rules for CVA's (to allow greater protection from creditors) and also said it will look at new forms of debtor in possession financing to ensure that restructured companies get the funding they need in Administration or CVA. Neither initiative may progress if we have an Autumn election of course.

Getting back to GM. Will this be the last big auto failure this year? No don't count on that. There is still a chance that Vauxhall enters administration. Fiat could find Chrysler too big a morsel to swallow and die trying, quite how putting together two basket cases makes one sound proposition is beyond me. Saab is in Swedish "Chapter 11" and if its market share declines much further any rationale for saving it becomes less compelling.

You could of course see the Chinese auto companies buy some of these troubled companies as a bridgehead into Europe. How interesting that would be.

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