links for 2009-06-09
Rational Expectations, Efficient Markets, and Economic Welfare

What If GM Were to Be Liquidated?

The threat point in the GM deal.

Andrew Ross Sorkin:

Imagining a G.M. Fire Sale - DealBook Blog - It’s hard to envision a company as large and complex as General Motors being sold off for scrap. But that’s just what the restructuring pros at AlixPartners had to do for their liquidation analysis of the company, which was filed in federal bankruptcy court in New York late Thursday.

Of course, G.M. is reorganizing in Chapter 11 and has no plans to liquidate. Bankrupt companies regularly perform this kind of exercise to give creditors a point of comparison as they consider a reorganization plan.

As a hypothetical exercise, though, the analysis is interesting: It found that in a fire sale, the largest United States automaker would likely yield less than $10 billion in net proceeds.

The costs of liquidating would be huge, according to the analysis — from $2 billion to $2.7 billion, the document says. Taking that into account, the amount left for creditors would be from $6.5 billion to $9.7 billion.

A large part of the value (from about $2.5 billion to $2.7 billion, before costs) would come from G.M.’s foreign subsidiaries, according to the analysis. These include G.M. Europe, which the company expects to sell anyway, and its units in Asia and Latin America, which G.M. has said it generally plans to keep.

And what would G.M.’s creditors get?

Bank lenders owed $5.4 billion would recover from 26.3 to 77.1 cents on the dollar. The United States Treasury, on the hook for $20.5 billion, fares even worse under this scenario, getting just 12.7 cents to 23.7 cents on the dollar for its claims. Unsecured creditors would get nothing.

Of course, there’s room for debate about many of the assumptions in the analysis, and AlixPartners readily concedes that there are plenty of unknowns. There hasn’t been a major United States automaker in liquidation in recent history, the document said, so there’s “no relevant precedent.”

For more details, take a look at the document below. The liquidation analysis starts on page 6.