Friday, June 12, 2009

Another View on Chrysler

The Chrysler deal has now closed, proving that it is possible to do a multi-billion dollar asset sale on an expedited timetable when the U.S. government is your DIP lender and is directing the pace. I am still scratching my head at the ease with which this deal went through. In the realm where I practice, an attempt to sell the debtor's assets to a purchaser selected by management for a small fraction of the secured debt would not only be denied, but would likely be followed by a motion for sanctions. However, when you are dealing with a debtor whose failure could send nuclear shock waves across the economy, it may be that the strict legalities give way to more pragmatic considerations.

Here is a pragmatic analysis from guest-blogger Steve Roberts.

How about this.

If the government did not step in, Chrysler would shut down and go into liquidation and the senior lenders with $6.9 billion in debt would be paid less than the $2 billion or 29 cents on the dollar the government is offering them.

So the government is using your and my money to bail out the lenders along with everyone else. But holdouts among the lenders are screaming that their constitutional and statutory rights are being violated because inferior claims are getting more.

Lets look at that. Who do we, the taxpayers, need if there is any chance for us to get our money back? The the supply chain and the workers. Without them there is no bailout and the senior lenders would get less. So New Chrysler cuts the unions into the deal and assumes the supply contracts with the suppliers to maintain the supply chain.

The Indiana pension funds, who are the last holdouts among the senior lenders, say that the government is hurting the teachers and state employees of Indiana with this bailout, so let's examine that. The fund managers for these funds bought Chrysler debt in or after 2007 and paid 43 cents on the dollar for it, betting that Chrysler would survive. They were wrong. They did not lose money because the government stepped in. They lost money because they lost on the risk they took.

These fund managers have said publicly in this case that they will settle for 50 cents on the dollar, a neat 7 cent profit. And since the government will not use your and my money to bail these fund managers out for their miscalculation, they are appealing the approval of the sale to the 2nd Circuit on an emergency basis.

They must be betting that the government will pay them more if they win and are willing to take the risk that the government will not let the bailout fail.

Since Steve wrote this analysis, both the Second Circuit and the Supreme Court refused to block the sale and it has now closed.

However, I think it highlights what an unusual case this is. Chrysler was not a meaningful player in its own bankruptcy. Instead, the case tested how much the treasury was willing to pay to avoid the collateral damage from a Chrysler failure. The senior lenders (or at least the holdouts) were not banks which had lent money directly to the debtor, but rather speculators who had bought the debt in the hopes of making of a profit. As Steve correctly points out, the objecting creditors, having seen that the government was in the bailout business, wanted a bailout of their own investment decision. The government stood firm and was backed up by the courts.

What I really want to know is how can I use this precedent in my next single asset real estate case?


lmclark said...

I don't have an answer as to how you can use Chrysler in your next single asset case. However, there are two things to note:

1. When 363 sales are driven by the senior secured lenders, in those cases too the debtors are effectively not players. So Chrysler is no different in that regard.

2. This case is not so unique that it won't serve as a strong precedent for the propriety of using 363 sales as a substitute for the plan confirmation process. Unless Congress steps in to change the statute itself, the future for unsecured creditors in bankruptcy cases is not bright.

MD said...

Comment from MD: Sadly, the "new" Chrysler has a poor chance of survival. This is its third reinvention in 20 years (Daimler-Chrysler, Chrysler L.L.C. and now Fiat). The world is over- supplied with car manufacturers. Its ability to borrow in the future is almost non-existent. A Ch. 7 liquidation will prove to have been a better solution.

Narconon Arrowhead said...

I've heard about that. I also heard that it was Toyota as well.