Wednesday, May 6, 2009

The Chrysler Sales Motion

Posted on Credit Slips by Stephen Lubben:

I wanted to start with something about the Chrysler sale because commentators whom I respect (see here and here) seem to be somewhat skeptical of the endeavor.

I think these commentators have misunderstood the structure of the sale, no doubt in part because the overall structure of the deal has been somewhat “over-described.” There are obvious political reasons for this – in particular, the Administration needs to present a complete story of how Chrysler’s employees will keep their jobs when the dust settles. There is also a general lack of chapter 11 understanding among both politicians and the press.

As I comprehend the sale structure, based on the pleadings filed late Sunday, the debtor will transfer key assets and contracts to a new Delaware LLC in exchange for $2 billion in cash and various cure payments. As part of the deal, the new owner (the Delaware LLC) will assume some contracts, including the labor agreements.

The last piece of this does technically violate the absolute priority rule, but in a way that is mandated by the Bankruptcy Code. Contract counterparties always get their prepetition claims paid in full when their contracts are assumed and assigned in a §363 sale. §365(b)(1).

The sale will be free and clear under §363(f)(3), using the argument that “value” in that provision means economic value. Reasonable parties can disagree on that point. But notice that if the dissenting lenders win on the (f)(3) argument it does not necessarily stop the sale, rather it probably just means that the sale price gets lowered (because of the increased risk for the buyer). Also keep in mind that the objecting creditors would seem to have the burden of proof here. §363(p)(2).

I don’t see how (a) the new owner’s renegotiation of the labor agreement or (b) the distribution of ownership interests in the new owner are issues for the bankruptcy court to approve. Financing provided to the new owner also does not seem to a topic for the bankruptcy court to rule on. This is not an SPM type case where a senior lender is “gifting” its recovery for the benefit of junior claimants – rather the new owner of the assets is providing ownership interests in exchange for new consideration (new financing and labor concessions).

The sale is subject to higher and better offers, despite what has been suggested, but we all know that such an offer is unlikely.

The one real complaint I see here is that the dissenting senior lenders are probably being precluding from credit-biding their claim by the conflicted senior lenders, many of whom have a controlling shareholder that is on both sides of this deal. (I’m assuming there is a collective action clause in the senior debt that precludes the dissenters from going it alone.)

Of course, there is always some risk that the big banks in a senior debt agreement will dominate the voting. Nevertheless, I'll pick up on the credit-bid issue in my next post, as I see that as the neglected issue of this argument.

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