Monday, May 4, 2009

This analysis shows the clear value advantage of the Fiat alliance over a plausible liquidation approach

TO BE NOTED: From Bloomberg:

Chrysler Non-TARP Lenders Object to Auction Plan (Update4)

By Christopher Scinta and Tiffany Kary

May 4 (Bloomberg) -- A group of Chrysler LLC’s secured lenders is seeking to block the bankrupt company’s plan to sell its business at auction this month, arguing that the U.S. government is violating federal law to preserve the automaker.

The group, calling itself Chrysler’s non-TARP lenders, in reference to the Troubled Assets Relief Program, seeks to block the proposed sale to an alliance led by Fiat SpA, as well as a request by the U.S. automaker for approval of a $4.5 billion Treasury loan to finance the reorganization.

Secured lenders that agreed to the Fiat deal, including JPMorgan Chase & Co., Citigroup Inc. and Goldman Sachs Group Inc., had conflicts of interest because they had also accepted TARP funds, the group said.

The process is “tainted” because it was dominated by the government, the lenders argued in papers filed today in U.S. Bankruptcy Court in Manhattan. The group also said the short period of time given to evaluate the sale was improper and the hearing on bid procedures that began today should be delayed. The judge delayed the hearing until 2:30 p.m. tomorrow, ordering the members of the lender group to reveal their identities.

‘Improperly Attempts’

The sale “improperly attempts to extinguish their property rights without their comment,” attorneys for the objecting lenders wrote in court papers.

“The sale motion should be denied because it seeks approval of a sale that cannot be approved under the bankruptcy code,” they argued. “The court should not permit a patently illegal sales process to go forward.”

Chrysler’s planned alliance with Turin, Italy-based Fiat, would create the world’s sixth-largest carmaker. Chrysler, based in Auburn Hills, Michigan, wasn’t able to pursue the merger outside bankruptcy because of opposition by the objecting lenders.

Under bankruptcy law, offers for bankrupt companies or their assets are generally subject to the possibility of higher bids at a court-supervised auction.

The Fiat offer, to be made from an as-yet unnamed entity formed by the Italian automaker, Chrysler employees and other parties, will be the lead bid in an auction, which is typically required for assets sold in bankruptcy. Chrysler is asking U.S. Bankruptcy Judge Arthur Gonzalez to approve bidding rules for an auction that would require creditor objections to the sale be submitted by May 11, followed by a May 15 deadline for competing bids. The bankrupt company seeks a May 21 hearing to approve the winning bid, according to the court filing.

Listed Assets

Chrysler, in its April 30 filings, listed assets of $39.3 billion and liabilities of $55.2 billion, making it the fifth-largest bankruptcy in U.S. history, according to data compiled by Bloomberg News.

Chrysler’s proposed sale favors junior creditors over senior creditors and would improperly channel the proceeds to specific creditor groups, the objecting lender group said in the court filing.

In court today, Thomas Lauria, a lawyer for the secured lender group, said some of its members have received death threats. In response to the judge’s demand that the members of his group be revealed, Lauria said the identities of more lenders would be revealed “promptly.”

Some of the lenders have already been identified, including OppenheimerFunds Inc., Perella Weinberg Capital Management LP’s Xerion hedge fund and Stairway Capital Advisors. Perella withdrew its objection last week.

‘Too Hot’

The group of non-TARP lenders includes 20 to 30 members, Lauria said outside the courtroom. He said the group fluctuates in size based on trading of the debt.

Some members, in addition to Xerion, have left because things are “too hot,” Lauria said. The group plans to file a motion today or tomorrow requesting that members’ identities be kept under seal, he said.

The group also objected to the request for debtor-in- possession financing, saying the terms of the loan, along with other requests by Chrysler, channeled $25 billion into the hands of other claimholders, including other secured lenders. Some of those lenders have been the recipient of government funds through TARP, the group said in the filing.

The objectors argued that the payments subvert the usual Chapter 11 process. Under Chrysler’s first-day motions in the bankruptcy case, it sought to pay $5.3 billion to business partners, $4.5 billion in other pre-bankruptcy debt, including employee wages, $9.8 billion in health care and other worker benefits, $5 billion in unfunded pension payments and $2 billion to secured lenders.

Lenders’ Rights

The proposed transactions improperly override “the contractual rights of the Chrysler non-TARP lenders and reverses the priority scheme” of bankruptcy law, they argued. “Only if the Treasury Department is prepared to acknowledge and respect the priority of claims contemplated by the bankruptcy code” should the DIP loan or any of the other transactions be allowed, the group added.

Chrysler has agreement from 62 percent of its secured lenders holding 90 percent of $6.9 billion in loans, a lawyer for the lenders said today in court. JPMorgan, the largest holder of the Chrysler loan, is the administrative agent for the other lenders and collected votes last week of lenders agreeing to a $2 billion cash payment in exchange for canceling their loan, said Peter Pantaleo, an attorney for the New York-based bank.

Objectionable Payments

The lenders in opposition objected to the plan to pay unsecured creditors $8 billion for pre-petition claims, including $4.2 billion to unsecured creditors and $3.65 billion for essential suppliers. Unsecured creditor payment would cover $2.8 million in warranty payments, $980 million for extended service and $375 million for incentive and rebate programs.

Capstone Advisory Group Executive Director Robert Manzo, called by Chrysler as a witness, testified in court today that some of the payments the automaker seeks to authorize will go to union employees at idle plants and to other unsecured creditors.

The objections of the group of secured lenders revolve around the argument that the bankruptcy code doesn’t allow unsecured creditors to be paid ahead of them. They alleged that, by paying union employees and business partners early in the case, Chrysler is stripping itself of assets promised as collateral to the secured lenders.

“The Treasury Department relies on TARP as the purported authority to justify this taking even though TARP was enacted after the senior lenders’ liens on the debtors’ property were already in place,” the group said.

Manzo said Chrysler tried to get DIP financing from lenders aside from the first-lien lenders and also failed.

“We went to other lenders, and they too, after literally a couple minutes of discussion, decided that was not an economic transaction that was worth pursuing,” he said.

Taxpayer Funded

Manzo also testified that the U.S. taxpayer-funded DIP loan couldn’t be passed on to other investors in the distressed trading market because its terms weren’t attractive.

Chrysler lost $16.8 billion in 2008, according to court filings. The company said it’s averaging a cash burn rate of $1.7 billion a month and said it will lose $4.7 billion this year, according to court papers.

The automaker has said the new company will have assets of $28.5 billion and debt of $26.5 billion. Assets, which are currently $35.4 billion according to Manzo, are projected to grow to $49 billion by 2016, it said.

2012 Profit

The new company’s net income is expected to be $100 million by 2012 and $1.6 billion in 2013, according to court papers, reaching $3 billion by 2016.

The projections were filed April 30 with Manzo’s declaration supporting Chrysler’s request to sell most of its assets to a group including Fiat.

“This analysis shows the clear value advantage of the Fiat alliance over a plausible liquidation approach,” Manzo said in the filing.

The projections depend on “debt forgiveness” of $5.4 billion by secured lenders, with payments of only $1.5 billion, according to the filing. The U.S. Treasury said in its plan filed in court that it would pay secured lenders $2 billion.

The case is In re. Chrysler LLC, 09-50002, U.S. Bankruptcy Court, Southern District of New York (Manhattan)

To contact the reporters on this story: Christopher Scinta in U.S. Bankruptcy Court in New York at and; Tiffany Kary in U.S. Bankruptcy Court in New York at"

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