Wednesday, May 6, 2009

Judge rejects opposition to Chrysler sale

Posted in the Financial Times by Nicole Bullock:

A US bankruptcy judge has rejected an attempt by dissident Chrysler creditors to derail the sale of the ailing carmaker’s viable assets to a group of new shareholders, including Italy’s Fiat.

In a ruling at 11pm EDT, Judge Arthur Gonzalez approved the process for the sale, which requires final court approval by May 27, as “appropriate and necessary”.

He overruled objections from a group of creditors who oppose the sale and who argued that the guidelines set out restrict competing bids. Lawyers for Chrysler said the Detroit automaker was a “wasting asset” that needed to be sold quickly to preserve jobs and the value of the company.

Chrysler is seeking to complete its restructuring within 60 days, emerging with a United Auto Workers union healthcare trust, the US government and Fiat as its main shareholders.

The opposition of dissident creditors, who call themselves the non-Tarp lenders, has dominated proceedings in the bankruptcy court since Chrysler filed for Chapter 11 protection last week.

Banks holding the bulk of $6.9bn in secured debt have accepted about 28 cents on the dollar in cash. But a group of about 20 investors, including Oppenheimer Funds and Stairway Capital, refused on the grounds that they were being strong-armed into concessions by the Obama administration.

They argue that the current deal strips them of their rights and runs counter to normal bankruptcy proceedings because it does not honor their senior claim on Chrysler’s assets.

The banks have received capital injections under Washington’s Troubled Asset Relief Programme, putting them under political pressure to accept Washington’s proposal.

The dissidents contended in a court filing that the proposed sale of Chrysler’s assets ”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 other important checks and balances typically found in good faith sales”.

They can still object as trial proceeds to final court approval.

During Tuesday’s hearing, the timeline for the sale was modified with key dates pushed back 5 to 6 days at the request of a separate committee of unsecured creditors. Bids now must be submitted by May 20, a lead bid chosen by May 26 and a final sale hearing take place by May 27.

Judge Gonzalez also ruled on Tuesday that the non-Tarp lenders must disclose their identities. They had earlier resisted on the grounds that some had received death threats.

The Chrysler bankruptcy proceedings are seen as a potential test case for the restructuring underway at its much larger and more complex rival General Motors.

GM has until the end of the month to agree with its bondholders on a way to slash substantially all of its $27bn in unsecured debt. The company has offered a 10 per cent equity stake, but bondholders want 58 per cent for their debt claim.

Comment by Harold Meyerson in the Washington Post:

Thomas Lauria, who represents those funds, argued Monday that the court should block the federal bridge loan that will keep Chrysler afloat during the bankruptcy proceedings. As Judge Arthur Gonzalez noted in denying Lauria's request, blocking the loan would force Chrysler (and, he could have added, many of its suppliers and dealers) to liquidate -- throwing tens (perhaps hundreds) of thousands of Americans out of work during the most serious recession since the 1930s and terminating medical benefits to tens of thousands of Chrysler retirees. Liquidation would also compel the American public to write off the loans the government has made to the company, rather than become shareholders in the slimmed-down Chrysler, as the Treasury's plan suggests.

But the public, the retirees, the dealers, the suppliers and the workers be damned. Liquidation is what the hedge funds want, on the theory that they could realize more than what the Treasury's plan offered them, from the sale of -- well, it's not clear what they think Chrysler can sell off at a decent price. Old auto factories in Michigan and Indiana? Who would buy them? To what end?

If the hedge funds are standing on principle, it's the principle that holders of secured debt should always have first claim to a bankrupt company's assets. But if they thought the administration would honor their claims above those of the public and other Chrysler stakeholders, they didn't do their due diligence about the Treasury officials who are in charge of restructuring the auto industry. In particular, they missed a 2006 speech delivered to a group of investors by Ron Bloom, the onetime investment banker who left Wall Street for the Steelworkers union, which he represented in scores of steel company restructurings, and whom President Obama tapped, along with Steve Rattner, to head up the administration's auto task force.

The banks and bondholders that lend companies money, Bloom said, constantly track the value of the bonds they hold, which enables "those who like the risk-reward ratio to take it and those who don't to liquidate their position and move on." Compare that, Bloom went on, to the position of retirees who deferred wage claims so that they could have a pension and medical benefits in retirement. If the company can't honor those claims, the retiree, unlike the bondholder, can't "take the company's promise, convert it to its present value and sell it to someone who would like to own it."

The Treasury's plan for Chrysler, and its proposed plan for General Motors, gives those retirees stock in the company -- the only way to keep afloat their otherwise unredeemable investment in Chrysler (that is, their medical benefits). It gives the public a stake in the company in return for its loans. It scraps the old management and board of directors, and downsizes the company to a point where the government believes it can become profitable again. It requires that 40 percent of Chrysler's production be performed in the United States -- a perfectly sensible, if groundbreaking, condition from a government that is committed to preserving and boosting domestic manufacturing.

In other words, the Treasury's approach to the auto industry is equitable, responsible to taxpayers and economically sensible. It is also, in almost every particular, the diametric opposite of its approach to the banks. In return for its major loans to floundering auto companies too big and strategic to be allowed to go under, the Treasury opted for a structured bankruptcy, converting its loans to shares, ousting top executives, shrinking the companies. In return for its mega-loans to floundering banks that were also too big and strategic to fail, the Treasury has not opted for structured bankruptcy, has not converted its loans into shares, has not forced out top executives, has not moved to make banks smaller (save in its proposal to limit leverage). Indeed, its bailout of AIG rewarded bondholders such as Goldman Sachs to the detriment of everyone else.

Why the difference? Why compel the restructuring of one crucial industry and leave another, whose mismanagement all but brought down the world economy, basically untouched? Could it be that the leaders and folkways of American banking are familiar to the men who run the Treasury, while the leaders and folkways of the American auto industry are not -- meaning that they can assess Detroit more dispassionately than they can Wall Street? In short, where is the Treasury's Ron Bloom for banking?

1 comment:

Anonymous said...

With this sale to Fiat, how many more jobs will leave America? I bet the executives (contractors that ran Chrysler)got one chunk of change when the ink hit the sale agreement. I remember when my company was sold in 2000, the CEO got $15 million plus all perks!!!! Since my money (a tax payer) was used to help affect this sale, the "contractor execs" should not get one cent in any form for this sale.