Saturday, May 2, 2009

The case of the dissident Chrysler bondholders

Posted on Credit Writedowns by Edward Harrison:

Yesterday, I posted a video in which two auto experts argued that the dissident shareholders were getting a raw deal (See "A discussion about Chrysler’s bankruptcy plan on Charlie Rose"). The crux of the problem is their belief that they were being railroaded into a deal in which they, as secured creditors, would receive less than unsecured creditors, that they would also receive less than in a liquidation, and that the government was using extortionate strong-arm tactics to make this happen. Tyler Durden has written a few posts about this (See "Guest Post: The White House Threatened To Destroy Perella Weinberg's Reputation")

I don't believe that these bondholders are going to get their way and there is good precedence for this in section 363 of the bankruptcy code from the case of Adelphia Communications.

Witness this article from the Am Law Daily:
Thomas Lauria, head of the restructuring practice at White & Case, is in a tough spot: the lead lawyer for the group of holdout lenders that the Obama administration is blaming for pushing Chrysler into Chapter 11.

The group, as you know by now, refused to take 33 cents on the dollar for the approximately $1 billion in Chrysler debt they hold. The four biggest bank lenders to Chrysler--all recipients of federal bailout money--took that deal, drawing praise from Obama for their decision.

Now Lauria is vowing to fight. Specifically, he says the holdout lenders will challenge the planned sale of Chrysler's prime assets to a new company controlled by the auto workers union and Fiat, according to Reuters. The lenders say the sale is an "end run" around established bankruptcy law that gives secured lenders priority over junior lenders (including the union) when it comes to getting repaid.

Lauria has been here before. In the contentious Adelphia Communications bankruptcy, Lauria led a group of creditors that filed late motions calling for a special trustee to investigate whether each group of note holders was getting what they deserved, according to this 2006 story from the New York Law Journal. A judge dismissed his motion, calling it a "nuclear war button" that threatened to disrupt the planned sale of Adelphia's prime assets to Time Warner and Comcast for nearly $18 billion.

This is the exact strategy University of Chicago law professor Douglas Baird predicted the holdout lenders would use when we interviewed him yesterday. As Baird noted, creditors have the right to challenge any bankruptcy reorganization plan that ends with them receiving less than they would have had the company been liquidated. The holdout lenders believe that to be the case here, Baird told us. But section 363 of the U.S. bankruptcy code allows for Chapter 11 debtors to sell assets before creditors can challenge the general reorganization plan.

That means Lauria's only option is to object to the sale, Baird told us.

Lauria did not respond to a message seeking comment; he's likely tied up at a massive hearing in federal bankruptcy court in Manhattan today.

On the other end of the lender spectrum is Simpson, Thacher & Bartlett, which is advising JPMorgan Chase, the lead lender to Chrysler. Peter Pantaleo, head of Simpson's bankruptcy practice, is representing JPMorgan. He declined to comment.

So will Lauria's plan work, or will only serve to delay Chrysler's emergence from bankruptcy? Steven Gross, co-chair of the restructuring practice at Debevoise & Plimpton, told our colleague Brian Baxter he's anxious to see the group's motion objecting to the sale. But Gross says the press release the lenders put out Thursday was "not very compelling," and that the chips may be stacked against their objection to the Fiat sale.

"People are saying this is just the government bullying people," Gross says. "But there is still a statute, and if there are grounds to derail [the sale], you can be sure [the non-TARP lenders] will use it, although in bankruptcy if you get some many constituents to support something, that can be very hard."

As always, stay tuned.
In essence, section 363 gives the bankrupt entity, in this case, Chrysler, the right to sell assets to another organization, in this case Fiat, BEFORE creditors can challenge the Chapter 11 reorganization plan. This significantly reduces the collateral against which secured creditors can make claims in bankruptcy.

The long and short is this:
  • Secured creditors might have gotten more in liquidation than they were being offered before Chrysler filed for bankruptcy.
  • However, because of section 363 of the bankruptcy code, Chrysler can sell substantially all of its assets to Fiat without creditor approval and before it has a definitive reorganization plan
  • This leaves the secured lenders out of luck. They could end up with less money than had they accepted the deal offered them earlier.

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