Saturday, December 20, 2008

More on the Auto Bailouts

by Adam Levitin at Credit Slips:

The term sheets are up here and here. Two initial observations:

(1) These are supposed to be secured loans, but they are almost assuredly junior liens--Chrysler already has a second lien facility, so that would make Treasury third. These liens might be underwater from the start, and a lot of the collateral probably isn't very valuable to anyone but GM or Chrysler. These companies are a lot like railroads in that a lot of their value is as going-concerns. Piecemeal, there isn't much there. This means that the primary value of being a secured creditor is having hostage value--the liquidation value isn't going to be very much. But if either GM or Chrysler can't meet the restructuring terms, they will be going into the Chapter to liquidate (whether they say so or not). And if that's the case, then it doesn't do the government much good to be secured.

(2) The government has tried to protect itself by providing that if there's a bankruptcy, the loan will rollover into a DIP facility at the government's exclusive option. I don't think that works. First, this is likely an executory contract, so it is automatically rejected under 11 USC 365(c)(2). Second, even if it isn't an executory contract, there will still have to be a 364 hearing. I can't see the government getting into a priming fight (or winning--there's no ability to offer the senior lienholders adequate protection). And because everything is encumbered, the government will have to settle for junior liens, which puts it right back where it was--an underwater junior. Moreover, if the government wants to do this as a rollup refi of the prepetition loan or a cross-collateralization, I'd wager that it will find itself in some pretty sharp litigation. There's no circuit level ruling (as far as I'm aware) that signs off on a rollup refinancing, and cross-collateralization is viewed very skeptically. There's huge hostage value to any creditor that can make a credible threat of pursuing such litigation. In any case, if GM or Chrysler goes into the Chapter as a freefall, the government would probably do well to wash its hands of the matter.

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