Tuesday, May 5, 2009

Debt holders move to block Chrysler’s restructuring

Posted in the Financial Times by Bernard Simon and Nicole Bullock:

A New York bankruptcy court will hear arguments on Tuesday by a group of Chrysler lenders seeking to block the restructuring of the ailing Detroit carmaker on the grounds that the process is “patently illegal”.

The dissident group, calling themselves the “non-Tarp lenders”, drew President Barack Obama’s ire last week after refusing to sign on to a deal under which Chrysler offered to swap $6.9bn of secured debt for $2.25bn in cash.

The four banks that hold the bulk of the debt – JPMorgan, Citigroup, Morgan Stanley and Goldman Sachs – accepted the offer under strong political pressure. All four have received emergency government aid through the troubled asset relief programme.

The dissident group includes about 20 money managers, among them Oppenheimer Funds and Stairway Capital Management. Mr Obama accused the group of forcing Chrysler into Chapter 11 bankruptcy protection last Thursday.

Chrysler asked a New York bankruptcy court on Monday to start the process of splitting it into “old” and “new” companies. In theory, a bidding process would take place for the new company on May 21 under section 363 of the US bankruptcy code.

But with no other prospective buyers in sight, the carmaker would almost certainly be sold to the healthcare fund of the United Auto Workers union, Italy’s Fiat, and the US and Canadian governments.

Assets in the old Chrysler would either be sold or closed down.

According to a court filing, Chrysler will not survive if the transaction is not completed within 60 days.

The US and Canadian governments will not provide financing beyond that time. On Monday night, the court granted Chrysler interim approval to access a $4.5bn bankruptcy loan from the US and Canadian governments.

Furthermore, Chrysler can support its supplier base and dealer network for only a short period. “When that period expires, so does Chrysler,” the filing warns.

The dissident non-Tarp lenders allege that Chrysler’s proposal strips them of their rights as senior lenders and ignores procedures set out in the bankruptcy code.

“It is a sale that was orchestrated entirely by the Treasury and foisted upon [Chrysler] without regard to corporate formalities, the fiduciary duties of [Chrysler’s] officers and directors, or the other important checks and balances typically found in good faith sales,” they said.

“The government exerted extreme pressure to coerce all of [Chrysler’s] constituencies into accepting a deal which is being done largely for the benefit of unsecured creditors at the expense of senior creditors.”

Court documents also shed new light on the scale of Chrysler’s financial plight. The company posted a loss of $16.8bn last year on revenues of $48.5bn. It had assets of $39.3bn on December 31, and liabilities of $55.2bn. This year’s loss is projected at $4.7bn.

The case has generated considerable public interest. A group ranging from lawyers to business school students lined up in the rain two hours before the start of the second day of proceedings in a lower Manhattan courtroom.

Tom Lauria, lawyer for the non-Tarp lenders, told the court that some of his clients had received death threats. The group may seek to keep the identities of the members secret for safety concerns and to avoid public pressure over not participating in the debt deal.

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