As GM Nears Bankruptcy, Chrysler Eyes Exit

The federal government expects a healthier Chrysler to emerge from bankruptcy sooner than expected, but a General Motors bankruptcy, now looking all but certain in the coming days, won't be as easy or as quick.

With a June 1 restructuring deadline looming, GM's situation is looking more complex than Chrysler's because it is a much larger company, with global operations and multiple governments involved, sources familiar with GM's discussions with the government say. Unlike Chrysler, GM also has public shareholders and a broader array of secured and unsecured debt holders.

Chrysler, which filed for bankruptcy on April 30, will complete the process "on the short end" of the 30- to 60-day timetable President Barack Obama outlined, the sources say. A key court hearing is scheduled for Wednesday on a plan to sell most of Chrysler's assets to a new entity paired with Italy's Fiat ( FIATY.PK - news - people ). If approved, the plan could allow the "new Chrysler" to exit bankruptcy proceedings by early June.

GM, meanwhile, could pass Chrysler on the way into bankruptcy court. On Tuesday, leaders of the United Automobile Workers union recommended that their members accept a deal that would substantially reduce GM's obligations to a trust fund set up for retiree health care.

GM had agreed to pay $20 billion into the fund, but under the terms of the deal it would instead kick in a 17.5% stake in a reorganized GM, plus a warrant for another 2.5% if GM stock rises, along with $6.5 billion in preferred stock and a new $2.5 billion note.

The UAW deal is a critical milestone in GM's government-supervised restructuring. Rank-and-file members will vote on the new contract terms on Wednesday and Thursday.

But the labor concessions, if approved, don't solve GM's other problem, which is getting 90% of unsecured bondholders to agree to a debt-for-equity swap that would leave them with 10% of the restructured company. Bondholders have balked at the offer, saying taxpayers and the union got a better deal. The deadline to accept the debt exchange offer is midnight Wednesday, but GM was said to be far from reaching the 90% hurdle.

There were reports that the government is prepared to inject about $50 billion in financing into GM to support it through a bankruptcy reorganization; in return, taxpayers would end up with a 70% equity stake in the resulting company.

In recommending the new labor deal, UAW leaders are putting $20 billion in retiree health care benefits at risk to bet on a GM recovery. The $6.5 billion worth of preferred stock has no voting rights, but will pay a 9% cash dividend, providing $585 million a year in income to the health care trust fund. The $2.5 billion note will be paid back to the trust in three installments in 2013, 2015 and 2017.

Even so, retirees will be required to give up their dental and vision coverage, among other benefits. And UAW leaders warned that, given the uncertainty in the future value of GM stock, further benefit cuts may be necessary in 2010 and 2011. If the trust fund can sell some of its GM stock in 2012 or thereafter, it might be able to restore some lost benefits.