GM drives route 363, bondholders beware

July 10, 2009

     The rough justice meted out to General Motors bondholders may have short-circuited the bankruptcy process, but it has damaged the confidence that holders of other debt can have in their right to fair treatment.
    There will be a long-term cost, both to borrowers and lenders as a result. Key to this has been the use — by both GM and Chrysler – of section 363 of Chapter 11 of the U.S. bankruptcy code. By invoking the “emergency” need to restructure the companies, this section has allowed the automakers to speed through the sale of the viable parts of the businesses to new companies and leave the debt behind.
    While route 363 by-passes lengthy court hearings, its use to sell prime assets drives straight through the spirit of the code, which was meant to allow companies going through a Chapter 11 to jettison non-core assets quickly as part of a longer and wider reorganisation. It was not designed to cream off the best ones.
    Lawyers are already invoking the Chrysler and GM examples to try and get round long-established rules for reorganisations.
    The result would be to deprive bond investors of their rights in a company restructuring.
    GM bondholders who would normally have enjoyed preferred credit status in a Chapter 11 were railroaded by the Obama administration into giving the quick-fire sale the go-ahead, on the grounds that this was a one-off.
    From GM’s point of view, the process has worked well, allowing the business to emerge only 40 days after filing for bankruptcy. The cost of the turnaround has been $50 billion in emergency government financing. The longer-term cost in the much bigger market for corporate debt may be far larger.


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So much for Obama’s dribble about the rule of law. I’d never invest a dime in any of these companies again. Ya know, this is right up there with we’re going to prosecute all the people that torture, but starting after what happened during the Bush administration.

In in quest to save the UAW political contributions and votes the president destroyed Chapter 11 bankruptcy code.
Now every company on shaky ground will have their bankruptcy attorneys cite the GM and Chrysler cases and use 363 to rob their creditors. Congress should rewrite the 363 code. There will be votes in it for the ones that push for a change. For now buyers beware. As far as GM goes they will have to borrow in the future from private capital. Good luck!

I bought some GM bonds. Are they worth anything now?

Posted by Ray Espinoza | Report as abusive