The Chrysler bankruptcy sale
4 May
Last Thursday the President announced a deal among Chrysler, Fiat, the UAW, the U.S. government, and several of Chrysler’s largest creditors. Some creditors oppose the deal, and Chrysler entered a bankruptcy process that will attempt to resolve this dispute.
The creditors left out of the deal are arguing that the Administration offered better deals to more junior creditors (such as UAW retirees) than to them. These objecting creditors think they can get a better deal from a bankruptcy judge than they were offered by the Administration.
This is not a traditional bankruptcy filing under Chapter 11. Instead, Chrysler, supported by the Administration, is using a section of the bankruptcy code (§363) to try to sell portions of Chrysler to a new company (called “NewCo”) and dump some of the liabilities. If approved by the bankruptcy court, this would appear to give Chrysler the ability to “roll” the recalcitrant creditors and implement the deal negotiated with the other parties. The Administration appears to think this §363 process gives them more leverage over the objecting creditors. The President has some smart and experienced people working on this, so I have no reason to doubt their judgment on this point.
A former colleague referred me to these two excellent posts on the §363 process at the Bankruptcy Litigation Blog, and the New York Times DealBook blog has a good follow-up post this morning. It appears that the key hearing will be Tuesday afternoon.
Here is the key argument framed by the Bankruptcy Litigation Blog (emphasis is mine):
Chrysler and all its major constituents will argue that the house is on fire and absent a quick sale on the agreed-upon terms, asset values (whatever’s left of them) will be irrevocably destroyed. The dissident lenders will argue that the fire is an ingenious illusion meant to force them to accept a deal that denies them their first priority rights to Chrysler’s assets and is merely a disguised plan of reorganization that a Court has no authority to approve in the §363 sale context.
The President is supporting Chrysler and aggressively opposing the objecting creditors, so I am confused as to why he said this last Thursday:
And that’s why I’m supporting Chrysler’s plans to use our bankruptcy laws to clear away its remaining obligations so the company can get back on its feet and onto a path of success.
The President’s language sounds like it is “a disguised plan of reorganization.”
The President emphasized that this process would be quick:
Because of the fact that the UAW and many of the banks, the biggest stakeholders in this whole process have already aligned, have already agreed, this process will be quick. It will be efficient. It’s designed to deal with those last few holdouts, and it will be controlled.
Last Thursday, every bankruptcy expert on CNBC disagreed that this could be completed within 60 days, as suggested by the Administration, but I think those experts had not yet focused on this §363 process. The DealBook blog points out that the negotiated agreement creates a June 15 deadline:
The key to this deal is that the parties have put it on a short leash. The agreement states that if the Chrysler sale is not completed by June 15, 2009 — extendable by 30 days if antitrust clearance is still needed — then Fiat can terminate the agreement at any time.
I am not a bankruptcy law expert, but the Administration’s negotiated agreement, bankruptcy strategy, time prediction, and TARP financing predictions all appear to be predicated on the court approving use of a §363 sale process. In particular, I am concerned about three effects if the court rejects the sale and tells Chrysler its only option is a traditional Chapter 11 restructuring process:
- Will this take so long that Chrysler’s sales will decline to the point where it has no chance of viability?
- Will this take so long that Treasury will have to put up tremendous amounts of constrained TARP cash as debtor-in-possession financing?
- Will the parties to the negotiated agreement, and especially UAW, try to walk away if the court rejects the §363 sale process?
I hope their plan still works, or they have a fallback plan, if the court instead sides with the objecting creditors and forces a traditional Chapter 11 restructuring.
Related Posts
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- Basic facts on the General Motors bankruptcy
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- Auto loans, part 4: Chrysler gets an ultimatum, GM gets a do-over
- Responding to Chrysler comments
- Should taxpayers subsidize Chrysler retiree pensions or health care?
- Auto loans: a deadline looms
- Senate floor #001: Leader Reid’s bankruptcy argument
I am confused, Mr Hennessey, as to why you “hope their plan still works”?
The issue with Chrysler is not just the company or its employees, but also the investors (aka bondholders) who did so on behalf of a large part of the investor class. Certainly the bondholder bought bonds that were classified according to their risk, which was significant in most cases, I suspect. However, for them to get “rolled” just so the company can be handed over to the UAW (who had their own role to play in the disaster that is Chrysler) and a foreign company with the hope of changes in support of the President’s environment objectives seems not only unfair, but corrupt and statist.
It seems to me that Robert Mugabe’s policy of land redistribution in Zimbabwe (taking it from the white farmers who were doing a good job for the sake of the policy goal of giving it to the black farmers) differs only in the amount of blood and violence. Justice certainly isn’t being served in either situation.
Excellent question. Please stay tuned until tomorrow, when I will further explain my views.
The much bigger concern should be if the Obama Administration’s proposal/edict ends up flying through court. An Administration controlled auto company through its designees (i.e. UAW, Fiat) is destined for failure. More importantly, security rights and contract law will be turned upside down making future lending problematic. Giving 55% to an unsecured UAW creditor and 20% to Fiat for bringing “green technology” – something that does not yet sell in the US – and ZERO capital, while cramming it down for 30 cents on the dollars on those with first security interests is criminal. The only debt holders who have accepted the deal are TARP participants whose stress test result releases have been delayed and one who was coerced to agree to the deal – listen to http://wjr.com/Article.asp?id=1301727&spid=6552. This is a scary power grab the likes of which I never though possible in the US. I hope Judge Gonzalez has the guts to do the right thing in the midst of intense Administration pressure.
I see where Chrysler is asking the Bankruptcy court to approve a $35 million “breakup” fee if the deal with Fiat fails.
Another ingredient added to the pot.
Wasn’t Obama just telling us:
“Churchill understood, you start taking shortcuts, over time, that corrodes what’s best in a people. It corrodes the character of a country.”
I guess that statement is ‘inoperative’ now.
So why not allow the bondholders a better deal, and the UAW a slightly worse one?
HONESTLY: NO ONE has any IDEA of the TRUE CONDITION of CHRYSLER’S Financial Condition.
And In a COUNTRY THAT OPERATED UNDER “THE RULE OF LAW” Until “THE BOY BARRY OBAMA” Came along. Chrysler would have already been in Chapter 11,,,IF What WE (The public) have been TOLD,,Is TRUE ! !
NEVER in MY LIFE (of 74 Years) 0f which 50 Have been spent in Law and Business, Have I EVER SEEN “SECURED CREDITORS” being Taken Advantage of by OUR GOVERNMENT in Order to RE PAY a POLITICAL DEBT, with a GIFT TO THE POLITICAL SUPPORTERS, UAW ! !
And IT MUST BE UNDERSTOOD THAT THE EXCESSIVE HIGH WAGES,,,INSURANCE PAYMENTS,,, and THE RETIREMENT FUNDS REQUIRED TO BE PAID TO, BASICALLY NON PRODUCTIVE PEOPLE OF THE UAW, IS IN FACT A LARGE PART OF CHRYSLERS’ PROBLEMS.
SO,,, “BARRY THE BOY” is going to GIVE a LARGE PART OF CHRYSLER to The NON PRODUCTIVE and “STRONG ARM” The BOND HOLDERS AND SECURED CREDITORS .
THERE GOES AMERICA as WE KNEW IT. WELCOME TO THE USSA ! ! AND COMRAD “ZAR” BARY THE BOY “ZERO”,OBAMA ! !
First, I have been a reader for a few weeks now. Keep up the good stuff!!
The structured bankruptcy of Chrysler, in my opinion, will be a large expensive bust followed by a thud when liquidation follows in 12 to 24 months. The pols running the show will insist that energy efficiency is the only way to go, i.e., small fuel efficient, plug ins. Very simply put, there is nothing in the past history of car sales in the US to indicate that there will be a large enough market for fuel efficient cars to provide a market for GM, Ford, Chrysler / Fiat plus all of the other foreign entries. Chrysler / Fiat will be the weakest company and therefore the probable first failure.
If the pols and the moneyed global warming crowd were true believers, they would live the path to lower energy usage, which they refuse to do, and they would all be hell bent toward the delivery of wind, solar, geothermal and nuclear power, which they aren’t. No rational persons want to follow the path of hypocrites because to them their credibility is non existent.
Until the pols and the global warming crowd decide that honesty, setting examples and ending their dismissive attitude toward the public at large, are important parts of the solutions, you can kiss any real change goodbye.
“…sell portions of Chrysler to a new company (called “NewCo”) and dump some of the liabilities.”
Isn’t this similar to what got Enron in trouble?
From http://en.wikipedia.org/wiki/Enron_scandal:
“Second, Enron relied extensively on structured finance transactions that involve setting up of special purpose entities. These transactions shared ownership of a specific cash flows and risks with outside investors and lenders. Traditional accounting, which focuses on arms-length transactions between independent entities, faces challenges in dealing with such transactions.”