Reply #8: GM seeks provision for its suppliers [View All]

[Demeter]

http://www.ft.com/cms/s/0/76c7ca06-2ad2-11de-8415-00144feabdc0.html


General Motors is prepared to argue that hundreds of its suppliers are “critical vendors” who require timely payments if it seeks bankruptcy protection, setting the stage for what would be the most sweeping attempt ever to win special treatment for such contractors, people close to the matter say.

Companies often request special treatment for a limited number of suppliers as part of bankruptcy petitions.

Bankruptcy experts say GM would stand a good chance of winning protection for more suppliers than is usual because of the large number that provide “just-in-time” car parts to the company.

“On its face, the justification for critical trade appears very strong here, as strong if not stronger than in most other cases,” said James Sprayregen, a bankruptcy partner at Kirkland & Ellis. “It’s hard to see how it’s going to be in anybody’s interest to shut the supply chain down.”

In recent months, GM has raised questions about whether a bankruptcy filing would create more problems than it would solve.

It has argued that a slowdown in payments to its vendors could prompt them to withhold supplies or go bankrupt themselves, creating turmoil across the US industrial sector.

By seeking permission to pay hundreds of suppliers, GM could mitigate damage to the car parts industry.

People close to GM say the company would make the request regardless of where it filed its bankruptcy petition. Company insiders say the most likely venues would be Detroit, New York or Delaware.

“No matter what court they go into, they’ll get authority to pay whatever suppliers they need,” said one person close to GM. “In a GM bankruptcy, there won’t be very much fallout for suppliers except perhaps for suppliers of Saturn and Hummer.”

Those two brands will be shut if they are not sold. More suppliers could drop outside the key vendor pool if GM is pressed to cull its portfolio further, targeting brands such as Pontiac.

GM would have to demonstrate in court that its business would be better off, and could retain more value if it pays key bills.

A judge could also force GM to prove that individual suppliers would stop operating or shipping goods if they were not paid, rather than letting GM use the money as it sees fit.

The critical vendor legal doctrine can be “subject to abuse and unfairness”, one attorney said. Roughly two-thirds of GM’s suppliers also sell parts to Ford or Chrysler, and some may be able to absorb late or reduced payments.

“It’s a game of chicken,” one attorney said. “How do you figure out which suppliers really will stop supplying tomorrow and which won’t?”