🚗 🚙 Turn your trusty old car into trustworthy journalism Learn more
Marketplace Scratch Pad

The truth Hertz

Scott Jagow Mar 5, 2009

GM finally acknowledged today in its annual report that its survival is in “substantial doubt.” GM said it could be forced to file for bankruptcy under various scenarios. I suppose if unicorns start buying cars, GM won’t have to file, but I’m glad to see a more rational expectation from the company. Still, the knock-on effects of a GM bankruptcy are many. Let’s start with the rental car companies.

DealBook looks at the situation for Hertz:

About 28 percent of Hertz’s rental fleet is G.M. cars, according to regulatory filings. For some of those cars, Hertz has agreements with G.M. that allow it to sell them back to the automaker, as well as “guaranteed depreciation” schedules that put a floor on the resale price.

The problem for Hertz is that if GM goes bankrupt, it could break those agreements. Hertz could be on the hook for major losses, and it’d be standing in line with other creditors hoping to get a piece. Last month, Hertz’s CFO admitted the loss from an automaker bankruptcy would be “material,” but she said Hertz has enough liquidity to handle it.

Also standing in line would be the dealerships. This week, GM sent out a memo to dealers about the company’s buyback policy. One line in particular stands out to me:

Payment will be made by GM as soon as practical following inspection (of the cars GM buys back).

As soon as practical… let’s see… 2050 sounds about right to us. It’s a raw deal for the dealerships, but bankruptcy could force some kind of payment.

As for suppliers, GM argues bankruptcy would kill them, but Harvard law professor Mark Roe made the case this week that Chapter 11 has clear procedures to remedy that problem:

Courts know that bankrupt companies need to keep getting supplies, inventory and parts for manufacturing to be viable. Hence, the bankruptcy code and the bankruptcy courts put payments for new supplies at the top of the queue, even ahead of most old lenders.

Even so, GM is still trotting out the argument that people won’t buy cars from a bankrupt company. On GM’s Fastlane blog this week, PR guy Tim Wilkinson says:

I ask: “Would professor Roe and his Harvard colleagues buy a car or truck from a company in bankruptcy, when there are similar products available at another dealership right down the block?” I expect that if they were honest, they would answer “Probably not.”

I ask: Would anyone buy cars from a company that’s headed for bankruptcy? If anything, car-buying taxpayers might appreciate a company that chooses the more secure path of Chapter 11 over the current “we can make it if we restructure and get enough money from the government” plan. Bankruptcy is a new reality and people understand that. And besides, focus your brand, make cars people want and bankruptcy won’t be an issue.

Finally, this interesting note. German car sales were up 21% in February. How in the world? Well, it turns out Germany started a new incentive program — trade in your old clunker for a new car and the government gives you 2,500 euros. It might just be another gimmick that won’t work long term, but there are environmental benefits, and I guess it’s something to think about.

The bottom line is that a GM bankruptcy will be tough on a lot of people. But if companies like Hertz say they can handle it and suppliers are given preferential treatment, I don’t see why Chapter 11 has to be such a boogeyman.

There’s a lot happening in the world.  Through it all, Marketplace is here for you. 

You rely on Marketplace to break down the world’s events and tell you how it affects you in a fact-based, approachable way. We rely on your financial support to keep making that possible. 

Your donation today powers the independent journalism that you rely on. For just $5/month, you can help sustain Marketplace so we can keep reporting on the things that matter to you.