Tuesday, May 12, 2009

If the administration and the union had just richened the deal offered the bondholders from 4-5 cents to maybe 10-12-15 cents on the dollar

TO BE NOTED: From the FT:

Long road to a ‘good GM’ filing

By John Dizard

Published: May 10 2009 11:07 | Last updated: May 10 2009 11:07

Flushed with the immediate tactical success of the Chrysler bankruptcy, the US administration’s plans for the subsequent GM filing are moving forward, along the lines laid out a couple of weeks ago. The White House’s auto task force, with the UAW, the car workers’ union, behind it, could have had a quick, consensual trip in and out of court, but apparently that wasn’t what they wanted.

The “363” plan (a provision under the Bankruptcy Act that allows the company to sell assets), is the means for a “good GM” funded by the government to buy assets from the existing company, or “bad GM”. The plan, based on a review of some fairly clear precedents from past cases, is a legally flawed way to disregard the rights of certain creditors – in GM’s case, their public bondholders.

The unsecured bondholders are being offered somewhere between 4 and 5 cents on the dollar for their claims. In contrast, unsecured claims (with equal legal rank) by the union retirees’ healthcare plan are being offered a recovery of 74 cents on the dollar.

Nevertheless, the plan will probably work, in the sense of achieving the intended short-term effect. The key to the tactic’s success is not its integrity, but the current lack of available exit financing for companies emerging from bankruptcy.

The 363 loophole, (really 363(b)), was intended to give a judge the authority to allow for the quick disposal of wasting assets, or assets that are not part of the core business, without waiting for creditors to vote their permission. It was not intended as a way to impose what is called a “sub rosa plan of reorganisation”. That is a plan of reorganisation of the entire company on which creditors do not get a vote.

In GM’s case, the “sub rosa plan” is to sell the valuable assets, with accompanying union contracts, to a new, “good” GM, and leave the money-losing assets in the original company, which is left in the street to bleed cash and die.

GM’s law firm, Weil Gotschal, has attempted to use this section of the bankruptcy code in the past, and had only mixed success in doing so. For example, a bankruptcy judge in New York ruled against a similar Weil Gotschal tactic in the Westpoint Stevens case, saying: “The fact that a transaction including a 363(b) sale of assets may ultimately be in the best economic interests of a debtor’s various constituencies does not authorise the court to ignore the creditors’ rights and procedural requirements of Chapter 11.”

Here’s how I believe the GM bankruptcy case will play out. The government, the UAW and GM are in a good position to “forum shop”, or find a bankruptcy judge who will be sympathetic to the government-UAW plan. That judge may be in New York (convenient for Weil Gotschal, headquartered in New York’s GM building), or Michigan (hometown advantage for GM). That judge will almost certainly grant the request of GM, the union and the government for the 363(b) sale.

Then the bondholders do some forum shopping of their own. They could well find a judge in a Federal district court (one level up from bankruptcy court) willing to grant a temporary restraining order blocking the 363(b) sale.

Given the facts of the case, and the precedent on the side of the bondholders, I think it’s quite possible that the judge will issue a TRO, and set a hearing on a motion by the bondholders to enjoin the sale.

That will be the end of the good news for the bondholders. The judge will read through the law, and the facts, and then ask an unpleasant question of the bondholders: what’s your alternative?

They won’t have one. There will be a great deal of back and forth, but at the end of the day the bondholders need – not just the law – but a big cheque book on their side, and the money isn’t there. Not for the $35bn (£23bn, €26bn) or so they would need to pay off the government and step into its commanding position.

Their problem is that the US government will be offering not just working capital for GM during its bankruptcy, but “exit financing” for GM’s emergence from Chapter 11. That is hard to get now on commercial terms, even on a smaller scale than would be needed for GM.

There are other problems with the government/union plan. The suppliers to the remaining “good” brands will need to spread their fixed costs over fewer parts, and transferring and revising all the contracts is logistically very difficult. Getting effective, decisive management, when the major shareholders have made unconvincing pledges to be hands off and avoid conflicts . . . very uncertain.

The bondholders still fight a hard, continuing, rearguard action, since they have little or nothing to lose, and want to preserve their rights and legal precedents for future reorganisations.

If the administration and the union had just richened the deal offered the bondholders from 4-5 cents to maybe 10-12-15 cents on the dollar, they might have got an agreed, prepackaged deal, and avoided a lot of sturm und drang.


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