Friday, May 1, 2009

I hope — and believe — you won’t get what you want out of it

From Reuters:

"Felix Salmon

a good kind of contagious

May 1st, 2009

Why we should thank the Chrysler hold-outs

Posted by: Felix Salmon
Tags: bankruptcy,

Joe Wiesenthal asks a how I can believe that bankruptcy is a good thing for Chrysler, and yet at the same time rail against the very hedge funds which drove Chrysler into bankruptcy. Quite easily, is the answer, so long as the creditors don’t get what they’re looking for out of the bankruptcy process. And although it’s very early days yet, I do have faith that the bankruptcy court will tell the creditors to take a hike if they try to demand much more than what the Obama administration was offering them.

The key thing to note is that the government already has the biggest senior creditors — the big banks — on its side. Which means that getting a supermajority of bondholders to agree to force the hold-outs to take the government’s offer might not be too difficult. Bloomberg explains:

Chrysler’s dissident lenders have on their side the “absolute priority” bankruptcy rule, which holds that value must be distributed according to the legal priorities of the stakeholders…

The absolute priority rule is regularly modified in bankruptcy court, said Richard Hahn, co-chairman of the bankruptcy practice at Debevoise & Plimpton LLP, a New York law firm that isn’t involved in the Chrysler negotiations. Two- thirds of the lenders can force the holdouts to go along with them in a procedure called a cram-down.

“The U.S. bankruptcy code foresees the possibility that it may be necessary to vary from absolute priority, in particular when a two-thirds majority is convinced it makes legal or business sense,” Hahn said. “If the government has consents from 70 percent, that’s more than enough” to give equity to junior creditors.

(Thanks to Nate for the pointer to the article.)

As for bankruptcy, most of the downside has already happened, with the firm’s sales down a whopping 48% in April. And Chrysler’s CEO, for one, has very much changed his tune on that issue:

BARTIROMO: Bob, the last time we spoke, you said to me, `Look, it’s a death knell if we go bankrupt because nobody is going to buy a car from a bankrupt company.’ Now you’re filing Chapter 11. What’s changed?

Mr. NARDELLI: Well, let me say this, Maria. Boy, I tell you, if I was ever wrong about something, I’m tickled to death I was wrong about that.

Of course, there’s probably a sense in which Nardelli has to say this. But still. I think this issue has been batted around the media enough by now that Americans are aware of the government warranty backstop, they’re aware that bankruptcy doesn’t mean the same thing as going out of business, and they’re even aware that if you buy a Chrysler going forwards, you’re going to be buying a car from a company 55% owned by its own workers. So the optics of bankruptcy are improving, it gives the company lots of much-needed flexibility on the dealership front, and it’s unlikely that the hold-out creditors will get what they want. So thank you, hedge funds, for forcing this move. I hope — and believe — you won’t get what you want out of it."


The holdouts can still try and get a better deal, even though they are below thirty percent. What they can try and argue, I assume, is that their fiduciary rights were violated. In other words, the other parties colluded to force them to bear an unfair amount of the pain.

I don't know if this will work, but they might be able to muck things up enough to get a better deal:

\"Administration officials said they believed that it was highly unlikely that a bankruptcy court judge would side with the minority when those holding 70 percent of the debt had signed off on the arrangement.

Bankruptcy law allows management of a company the exclusive right to draft a plan of reorganization. A judge can extend that period of exclusivity for 18 months, but creditors or potential buyers for a company can present a competing plan once that period expires.The United Automobile Workers union has agreed to accept company stock for 50 percent of what Chrysler owes its retiree health care fund. Most of the major debtholders, led by JPMorgan Chase, agreed to write down the debt owed to them by more than two-thirds.

But the remaining holdouts — including units of OppenheimerFunds, Xerion Capital Fund of Perella Weinberg Partners and Stairway Capital Management — refused offers to buy out their debt, forcing a bankruptcy filing. They argued that they were falling victim to the willingness of their big banking partners in Chrysler to make concessions to a government that had helped bail them out as well( NB DON ). Perella Weinberg decided late Thursday that it would accept the government’s terms.\"

And from their statement:

\"We are deeply concerned with today’s decision by GM and the auto task force to offer only a small, inequitable percentage of stock to its bondholders in exchange for their bonds.

We believe the offer to be a blatant disregard of fairness for the bondholders who have funded this company and amounts to using taxpayer money to show political favoritism of one creditor over another.

Today’s posturing makes it clear that the company and the auto task force would rather discount the thousands of individual investors and retirees who own GM bonds than undergo earnest negotiations.

The current offer is neither reasonable nor adequate. Both the union and the bondholders hold unsecured claims against GM. However, the union’s VEBA would receive a 50 percent recovery in cash and a 39 percent stake in a new GM for its $20 billion in obligations; while bondholders, who own more than $27 billion in GM bonds and have the same legal rights as the unions, would only receive a mere 10 percent of the restructured company and essentially no cash.

The offer was made unilaterally, without any prior discussion or negotiation with bondholders and in spite of repeated calls for dialogue. "

In all honesty, with the statements being made about them and their lack of standing, they might have a case. You cannot single out a particular group because you don't like them, which is what they might well argue is happening. I'm not sure that social policy overrides their legal standing.

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