The warning comes the day after word of a new hard-ball offer for unsecured bondholders at GM, and highlights the fact that the clock for both companies is ticking. GM has until the end of May to strike a deal with stakeholders; Chrysler has until the end of April.
Bankruptcy experts have called a filing by the two companies likely, and both companies and their stakeholders have been actively preparing for that eventuality.
The ratings firm warned that large parts of Chrysler likely would be broken up and sold off if it files for bankruptcy protection and that second-lien loan holders should expect payouts of 10% or less. First-lien loan holders can expect payments of 30% to 50%.
The market appears to have already priced in worse possibilities. Chrysler's first-lien loans were trading at 15 cents/18 cents when the market closed Thursday, according to a hedge-fund trader who is active in the name.
The first-lien loans are held mostly by big banks, led by Goldman Sachs Group Inc. and JPMorgan Chase & Co., the trader said. Bank loans secured by assets have historically returned more than 90%.
S&P said a bankruptcy filing would likely occur around the end of April or soon after if Chrysler is unable to finalize an agreement with Italy's Fiat SpA (FIATY), win concessions from its main labor union and secured lenders, or otherwise satisfying the Obama administration.
The prognosis for GM's secured debt holders was far better; they can expect payments of 70% to 90% in event of default on the revolving loan, S&P said, compared with the current market price of 33-1/2 cents/36-1/2 cents. S&P added that term-loan holders could get between 90 cents on the dollar and par, well above where the bond trades now at 45 cents/47 cents.
However, the agency said its estimates exclude the possibility of debtor-in-possession financing - the loans to get a company through the bankruptcy process - which would come before any other claims.
The ratings agency made the comments Friday as it lowered its issue-level ratings on Chrysler's senior secured first-lien term loan due 2013 one notch to CC from CCC. The latest view reflects S&P's view of a likelihood of default, either from a bankruptcy or a distressed-debt exchange. At the same time, it lowered its issue rating on the company's secured second-lien term loan due 2014 to C.
Separately, S&P lowered its issue-level ratings on GM's $4.5 billion senior secured revolving credit facility to CCC-, one notch above the company's CC corporate credit rating, but kept the rating on its term loan.
S&P said the rating on the GM credit facility was lowered due to concerns about persistently weaker demand for light vehicles in North America, as well as declining pools of assets securing the facility.
The corporate credit rating for each company remained unchanged at CC.
The economic downturn and a shift in the market away from sport-utility vehicles have hurt GM, Chrysler and Ford Motor Co. (F). Restructuring plans from GM and Chrysler have come under increased scrutiny from the administration.
Late last month, President Obama gave Chrysler just a month to wrap up a partnership with Fiat. GM most recently asked for an additional $16.6 billion capital infusion as Chrysler sought $6 billion. They have already received $13.4 billion and $4 billion, respectively.
