Ottawa braces Canadians for auto bankruptcies

[wahyinghung]

The federal government is bracing Canadians for the possibility that General Motors Corp. and Chrysler LLC will slide into bankruptcy, unveiling plans to guarantee warranties on all new cars and trucks the automakers sell and boosting protection for auto-supplier shipments by $700-million.

Tony Clement, the federal Industry Minister, acknowledged that the government must steel itself for the prospect that the companies' restructuring efforts will fail and that a creditor protection filing will be necessary to give them a new lease on life. The entire North American car industry, which has powered the economies of southern Ontario and the U.S. Midwest for decades, is at risk, he said.

"There used to be a phrase in the auto sector, 'Too big to fail.' I don't think that phrase exists anymore in this sector or any other sector," Clement said Tuesday. "We are in unprecedented times."

Chrysler has said it would need $24 billion U.S. to emerge from bankruptcy protection, without which it would liquidate its assets.

GM has said it would need at least $57 billion U.S. from the U.S. and other governments to survive a traditional credit-protection process. The company is said to be accelerating preparations for a fast-track filing while also doubling efforts to find more cost savings. Under one scenario being discussed, it would try to create a new company by keeping only the best parts of its business.

GM shares fell as much as 14 per cent Tuesday to close at $2 U.S.. Shares of Magna International Inc., Canada's largest parts supplier, dropped five per cent to end the day at $31.81 U.S. in New York trading.

Washington and Ottawa last month rejected restructuring plans submitted by GM and Chrysler as a condition for winning taxpayer aid.

The governments said the fixes the companies proposed to regain profitability did not go far enough to warrant more public money beyond the $17.4 billion U.S. the United States has pledged and $4 billion promised by Canada. The governments did not set a specific cost-cutting target.

GM now has until May 31 to strike a definitive deal with its bondholders to swap debt for equity, convince its two main unions to accept more concessions, and slash operational costs so it can break even at a lower sales rate. Chrysler has until April 30 to wipe out most of its debt owed to JPMorgan and other lenders, renegotiate labour contracts and finalize a commercial alliance with Italian carmaker Fiat Spa.

If they can't forge new plans with commitments by stakeholders to become viable, they face restructuring in bankruptcy court.

"Clearly we want the restructuring plans approved," Clement said Wednesday. "That is our first option, but not the only option. We have to ready ourselves for other options, including Chapter 11 in the United States and (protection under the Companies' Creditors Arrangement Act) in Canada."

In one measure announced Tuesday, Ottawa will expand the amount of receivables insurance Export Development Canada can underwrite to auto suppliers by $700 million, bringing the crown corporation's total auto insurance fund to $1.25 billion.

The aim is to stabilize the parts companies, which employ 75,000 people nationwide.

Through this insurance, parts makers can retrieve the bulk of what they are owed in the event its customer, a carmaker, does not pay the bill. EDC charges a fee of 75 cents for each $100 of invoiced value based on 45-day payment terms. The insurance protects 90 per cent of the shipment's value.

Clement said parts makers' cash flow has slowed to a "trickle" due to the global credit crisis, and that EDC's existing $550-million insurance fund was tapped out.

Suppliers have complained that the insurance is too expensive. Gerry Fedchun, president of the Automotive Parts Manufacturers Association, said it may be too little to late for some firms already on the brink of collapse. "The key will be getting the money out quickly and not waste time making it happen. Some companies will go under sooner rather than later."

On the consumer side, Ottawa is also closely mimicking a U.S. program to guarantee auto warranties for consumers who buy new cars from GM or Chrysler. The scheme carries a cost of $183 million to the government and would end "when the period of uncertainty ends" for the carmakers, Clement said. A background document on the program indicated Ottawa will backstop the warranties for the next 12 months.

"You have to show the consumer that regardless of what happens they will not be abandoned," said Geoff Helby, an analyst with market research firm J.D. Power & Associates. "This is going to give (prospective GM and Chrysler buyers) who may be teetering the confidence to move forward with their purchase knowing that if the worst-case scenario occurs that they are covered."

GM sold 50,168 new cars and trucks in Canada through the end of March, a 40 per cent decline over the first quarter of 2008. Chrysler sold 38,939 vehicles, a 29 per cent drop.

Analysts note the warranty program won't necessarily solve a more pressing underlying issue, which is that consumers have slowly been abandoning GM and Chrysler vehicles for years.

Taxpayers should not have to pay for that failure, said industry consultant Dennis DesRosiers.

"Stop the insanity," DesRosiers said in a note to clients. "I don't know about you but no taxpayer pays for my brake job every 3-4 years. Help me here. Isn't quality or lack of quality one of the reasons that these companies have lost so much market share over the years? Now our governments are going to subsidize warranties for these same vehicles."
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