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Dealers must coalesce if OEs go bankrupt

November 15, 2010

Six panelists at a CATA presentation April 28 about how dealers should prepare for bankruptcy filings by General Motors or Chrysler agreed on one thing: the Chapter 11 filings are inevitable.

The national dealer councils (NDC) of both Chrysler and GM, with the NADA’s assistance, have retained separate legal counsel with expertise in corporaterestrucuring and bankruptcy matters to advocate the collective interests of dealers. Separate legal representation would be required for individual dealer issues and claims and for dealers with conflicting issues. 

The NADA mailed information about the counsel on April 24 to all affected dealers.

For example, the NDCs will seek to address dealers’ rights with respect to amounts owed to them by an automaker for things like incentive and warranty payments, holdback, floorplan assistance payments and dealer advertising.

The CATA panelists agreed that retaining the NDC counsel is a cost effective way for local dealers "to have eyes and ears into what’s going on."

Some dealers may find themselves subject to termination that may be permitted by a bankruptcy court. However, it is not practical for a manufacturer to eliminate a majority of dealers if the manufacturer is to emerge as a healthy company from bankruptcy that can continue to sell vehicles. Also, a manufacturer may have to justify why it is seeking to terminate some dealers and not others.

Bankruptcy attorney Bruce Wald, a panelist at the CATA seminar, " ‘What if’ GM and Chrysler enter Chapter 11," said Chapter 11 protection trumps any state dealer franchise act, even as Illinois races to strengthen its act.

Attorney Mark Lyman, another panelist, said dealers should review all their contracts, "from your computer vendor all the way down to the janitorial service." He said dealers should avoid any long-term contracts, such as a newer Red Flags Rule compliance agreement that could grant either party a 60-day right to terminate.

"You need the flexibility in these times," Lyman said.

Tom McDonald is the managing director in the Chicago office of Macquarie Capital, a global investment bank specializing in restructuring and mergers and acquisitions. McDonald said dealers must act now to ensure their interests are protected in the OEM restructurings.

"Have that sense of paranoia and looking over your shoulder at all times, because you’re going to need that," he said.

Government intervention, said McDonald, has enabled GM and Chrysler "to live another day. But restructuring outside of bankruptcy ain’t gonna happen. Analysts say GM will need $20 billion more after restructuring."

Gaurav Malhotra, also with Macquarie, said forecasts for aggressive sales growth for GM lead to positive operating cash flow beginning in 2012, but ongoing liabilities like pension obligations would keep GM mired in a negative net cash flow.

Ken Stevens of Crowe Horwath advised dealers to examine cost cutting to maintain their cash and equity positions; and to talk to their lenders because they still would be bound to contracts with the lenders.

Look at everything and go as deep as possible, Stevens said. Obtain concessions from vendors and focus on the company’s two largest expense areas: compensation and advertising.

Bankruptcy attorney Steven Towbin encouraged affected dealers to join the National Dealer Committees. But he said dealers whose franchise agreements are rejected don’t have many options.

"There really isn’t much of a defense," Towbin said. "It is what’s in the best interests of the debtor that’s more important to the judge. But if you can persuade the judge, as a group, that the damages (of closed points) are so great, you could challenge it. But you’ve got to get organized to have any chance of conditioning this."

Among questions by the nearly 125 dealers in attendance: If a dealership is forced to close, would the automaker accept returned inventory? Towbin said he wasn’t certain, but it probably wouldn’t have to because its contract with the dealer will have been broken. Subsequent negotiations might lead to the dealer remaining in business long enough to sell any remaining inventory. Others:

• Pontiac dealers should not be optimistic about being compensated for the brand scheduled to be phased out.

• During the course of the bankruptcy, retained dealers will get payments they are due from the manufacturer. Payments might be delayed by bankruptcy red tape, but the payments would be respected.

The goal for a court in dealing with a reorganization bankruptcy is to allow a company to rehabilitate itself so that it can emerge from the bankruptcy. That can’t happen if the manufacturer damages its equity by effectively ceasing business and its dealers fail because the manufacturer does not pay ongoing obligations.

But on the prospect of a UAW/government-owned automobile company, Towbin said, "If you like the way the post office works, if you like the way Fannie Maeworks, . . ."