Detroit/Frankfurt: Europe approved $1.17 billion of loans to support the region’s struggling automakers on Tuesday, even as preparations intensified for a possible bankruptcy at General Motors Corp due to lack of progress in restructuring the ailing company.
GM, which has until 1 June to complete a reorganization plan, is in “intense” and “earnest” preparations for a possible bankruptcy filing, a source familiar with the company’s plans said, sending its shares down 14%.
The European Investment Bank approved €866 million of loans ($1.17 billion) to several automakers, including Volkswagen AG, Nissan Motor Co Ltd and Jaguar to help them develop and build more fuel-efficient vehicles in Europe.
The money is part of a €7 billion package to the industry the European union’s lending arm expects to complete in the first half of this year. The bank lent money to German, Italian, French and Swedish automakers in March.
The European aid came as several German automakers reported lower March sales that underscored the severity of the global downturn in auto sales triggered by an economic recession.
Germany’s BMW said its global vehicle sales fell 17.2% in March and global unit sales for Daimler AG’s luxury Mercedes-Benz brand were down 16%.
Worries about the impact of possible automaker bankruptcies are widening and Canadian Industry minister Tony Clement said on Tuesday the government must be prepared for GM or Chrysler to enter bankruptcy protection.
GM, operating with $13.4 billion of government loans since the start of the year, is under pressure to cut unsecured debt by two-thirds and make half of its remaining payments into a union healthcare trust in equity to preserve cash. The government has warned the alternative would be bankruptcy.
A plan to split GM into a “new” company made up of its most successful units and an “old” company of unprofitable units, is gaining momentum and is seen as the most sensible configuration, said a source familiar with the talks.
GM shares fell more than 14%, or 32 cents, to a session low of $1.95.
GM’s bonds were steady to slightly lower in late morning trading. GM’s benchmark 2033 bond slipped, with the 8.375% bond trading at 12 cents, compared with 12.75 cents before the news came out, according to MarketAxess data. The bonds closed at about 11 cents on Monday, according to MarketAxess data.
Moody’s Investors Service said GM and Chrysler have a 70% chance of bankruptcy due to the difficulty of winning deep concessions from creditors out of court.
“Given the lack of progress achieved and the additional progress that will be required in the revised plans, this threat will need to be seen as credible in order to compel adequate movement on the part of stakeholders,” Moody’s said.
Chrysler, owned by Cerberus Capital Management LP, also faces possible bankruptcy. Chrysler has until 30 April to complete an alliance with Italian automaker Fiat.