Moody's: Big Three automakers likely need bailout, bankruptcy combo; straight filings could spell disaster

By Caroline Salls

Pittsburgh, Dec. 16 - Moody's Investors Service reported Tuesday that Ford Motor Co., General Motors Corp. and Chrysler LLC will most likely need to use government financial assistance and pre-packaged bankruptcy filings to complete their restructurings, and the agency warned that a "freefall bankruptcy" option would hit the economy and bondholders the hardest.

According to the report, entitled "U.S. Automakers: Credit Implications of Three Scenarios Have Broad Reach," the "freefall bankruptcy" scenario, defined by Moody's as a bankruptcy filing made without a pre-packaged plan or government involvement, has only a 5% likelihood.

"The negative consumer sentiment and erosion of franchise value would make the reorganization process more complex for the automakers and a Chapter 7 liquidation of at least one of the automakers possible," Moody's senior vice president Bruce Clark said in a news release.

"Auto bondholder losses could be in the 75% to 100% range in this scenario.

"We think it's most likely that a prepackaged bankruptcy filing coupled with government financial assistance will be needed to restructure the Big Three."

Moody's said the U.S. government will likely provide immediate stopgap bridge financing for the automakers until a more complete agreement can be reached early in 2009.

"The government will also probably offer support by providing or guaranteeing debtor-in-possession or DIP financing, and bondholder losses would probably be less than 75% in this scenario.

"A pre-packaged bankruptcy might be the best approach to current problems, but achieving timely agreement from a broad range of creditors would be highly difficult, especially given the critical funding status of GM and Chrysler," Clark said in the release.

While Moody's gave a pre-packaged bankruptcy filing, coupled with government financial assistance, a 70% likelihood of coming to pass, it also assigned a 25% probability of a government bailout without a near-term automaker bankruptcy.

"The degree of economic disruption and direct financial loss for investors [under a bailout-only scenario] would be contained, at least in the short term," Clark said in the release.

"Bondholder losses would be the least in this scenario, although there is a risk that such a reorganization would be inadequate, and that at least one automaker might file for bankruptcy beyond 2009."

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