Tick Tock, Autos

Story Highlights:

• The turnaround plans GM and Chrysler submitted to the government in February failed several benchmarks. Now, the government is taking a harder look at reorganizing the companies through bankruptcy.
• The government will give GM 60 days to develop a more aggressive restructuring plan and Chrysler 30 days to complete a definitive alliance with Italian automaker Fiat SpA.
• A sharp turnaround for GM and Chrysler in the short term looks unlikely. We've said before reorganization through bankruptcy is the likely outcome for these companies.
• Bankruptcy through Chapter 11 can provide a legal structure to do what the automakers have been trying to do for the past few months—reorganize and become viable companies.

(Editor's Note: MarketMinder does NOT recommend individual securities; the below is simply an example of a broader theme we wish to highlight.)
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General Motors and Chrysler are quickly running out of road. Both companies received government bridge loans in December to stay in business, under the condition they restructure and develop strategies for long-term viability. However, the turnaround plans GM and Chrysler submitted to the government in February failed several benchmarks. Now, the government no longer wants to throw money at these floundering firms and is instead taking a harder look at reorganizing the companies through bankruptcy.

GM and Chrysler hoped the plans they submitted in February would lead to another round of government loans. Instead, the plans led to a new GM CEO and a set of ultimatums. The government wants the automakers to develop a more aggressive restructuring plan, including substantially reducing debt and existing liabilities, making greater balance sheet concessions, and operational restructuring. GM will have 60 days to formulate a new plan. Chrysler will have 30 days, during which it must complete a definitive alliance with Italian automaker Fiat SpA. The government will provide working capital to both companies in these periods.

Still, a sharp turnaround for GM and Chrysler in the short term looks unlikely. We've said in this space for months, reorganization through a pre-packaged bankruptcy is the most efficient path to viability for these companies. The Obama administration isn't shying away from bankruptcy as an option and is floating the idea of a "surgical" structured bankruptcy—splicing and dicing each automaker's "bad" and "good" parts to essentially create a healthier company and one that works through its debt obligations and underperforming assets over a longer period in bankruptcy court.

Bankruptcy through Chapter 11 isn't an end-all. Chapter 11 allows a firm to reorganize while remaining in business—a legal structure that allows the automakers to do what they've been trying to do for the past few months. This process could help GM and Chrysler emerge stronger and more stable—and that's better for the economy long term. Job losses are a concern, but estimates of auto-related job losses are dramatically exaggerated to provoke reaction to the situation rather than serve as a rational assessment. One real concern is what role the government will take in the bankruptcy proceedings—normally a process not subject to political pressures. Already, President Obama's vowed the auto industry will not "simply vanish," suggesting the government will aid automakers in some way if necessary. Thus far, however, the administration seems to be taking a more realistic view of these companies' futures.

GM and Chrysler have 60 and 30 days respectively to alter what seems to be their prevailing course. But they may just be preparing for the inevitable—and likely better—outcome.