Why we should thank the Chrysler hold-outs

By Felix Salmon
May 1, 2009

Joe Weisenthal asks a how I can believe that bankruptcy is a good thing for Chrysler, and yet at the same time rail against the very hedge funds which drove Chrysler into bankruptcy. Quite easily, is the answer, so long as the creditors don’t get what they’re looking for out of the bankruptcy process. And although it’s very early days yet, I do have faith that the bankruptcy court will tell the creditors to take a hike if they try to demand much more than what the Obama administration was offering them.

The key thing to note is that the government already has the biggest senior creditors — the big banks — on its side. Which means that getting a supermajority of bondholders to agree to force the hold-outs to take the government’s offer might not be too difficult. Bloomberg explains:

Chrysler’s dissident lenders have on their side the “absolute priority” bankruptcy rule, which holds that value must be distributed according to the legal priorities of the stakeholders…

The absolute priority rule is regularly modified in bankruptcy court, said Richard Hahn, co-chairman of the bankruptcy practice at Debevoise & Plimpton LLP, a New York law firm that isn’t involved in the Chrysler negotiations. Two- thirds of the lenders can force the holdouts to go along with them in a procedure called a cram-down.

“The U.S. bankruptcy code foresees the possibility that it may be necessary to vary from absolute priority, in particular when a two-thirds majority is convinced it makes legal or business sense,” Hahn said. “If the government has consents from 70 percent, that’s more than enough” to give equity to junior creditors.

(Thanks to Nate for the pointer to the article.)

As for bankruptcy, most of the downside has already happened, with the firm’s sales down a whopping 48% in April. And Chrysler’s CEO, for one, has very much changed his tune on that issue:

BARTIROMO: Bob, the last time we spoke, you said to me, `Look, it’s a death knell if we go bankrupt because nobody is going to buy a car from a bankrupt company.’ Now you’re filing Chapter 11. What’s changed?

Mr. NARDELLI: Well, let me say this, Maria. Boy, I tell you, if I was ever wrong about something, I’m tickled to death I was wrong about that.

Of course, there’s probably a sense in which Nardelli has to say this. But still. I think this issue has been batted around the media enough by now that Americans are aware of the government warranty backstop, they’re aware that bankruptcy doesn’t mean the same thing as going out of business, and they’re even aware that if you buy a Chrysler going forwards, you’re going to be buying a car from a company 55% owned by its own workers. So the optics of bankruptcy are improving, it gives the company lots of much-needed flexibility on the dealership front, and it’s unlikely that the hold-out creditors will get what they want. So thank you, hedge funds, for forcing this move. I hope — and believe — you won’t get what you want out of it.

14 comments

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It really is a legal question – and I think one significant question is how well does the super majority represent the holdouts. Does it really make legal or business sense?

Lets face it – the other senior creditors have political considerations. Even if it does make legal or business sense for them to say no, the couldn’t if they wanted to.

Whether the holdouts can make this argument under a legal standard, I don’t know. But you could see why they would try.

Posted by Chris G | Report as abusive

I hope that the “holdout” lawyers are able to stop the illegal 363 sale which is really quasi reorganization. There is no reason for the UAW healthcare fund to get a 50% equity stake when the trade creditors (who I might add, are at the same priority level) get totally wiped. If this 363 goes through, every distressed company in America will file chapter 11 in new york and sell themselves off without liabilities to friends of the company for a song. Precedents may not matter on wall street, but they matter in court.

Posted by Aiden | Report as abusive

Chrysler is doomed because there is a world wide over capacity to build autos. We don’t need Chrysler. Ford and GM will do better without them. Supply & Demand, The Law of Scarcity, and Competitive costs rule, not Obama nor a Bankruptcy Judge if they emerge. We have wasted Billions!

What is the future? China who is now has largest market share and our cars will be built there just like Apple’s IPods, Gateway Computers, and many of our high tech products. Yes, the Chinese Invasion of cars is coming!

Posted by Wags | Report as abusive

As you yourself say, Felix, “aggressive creditors are going to want to maximize the value of their claims, both in bankruptcy court and in the press.” That’s their job, so for you to pour scorn on their protests is a bit rich, frankly.
Yes, they may get crammed down by the two-thirds/50 percent group of the senior creditors that are with Obama, but they have an absolute right to make the argument that they are at the top of the capital structure, senior to TARP, senior to the UAW, and therefore should get due consideration in any kind of negotiation.
And ask yourself why those big banks are with Obama – could it have anything to do with all that government support they’ve been getting recently, do you think?
So it’s also fair enough for the holdout creditors to complain that the administration is all but making an end run around the system, by muscling lenders into its fold.
Maybe it would be better for everyone involved if the politics failed here, that Obama failed to get his majority and this ended up before a judge, the hard-eyed, impartial kind who’d give a Harvey Smith-style salute to the White House and stick to the letter of the law instead.

Posted by paddy | Report as abusive

” I do have faith that the bankruptcy court will tell the creditors to take a hike if they try to demand much more than what the Obama administration was offering them.”

In light of the revelation that Ken Lewis was ‘strongarmed’ to act against the fiduciary interests of BAC shareholders, and given the high percentage of institutions on the hook to the Government for operating capital, I think it reasonable to consider the possibility that the banks who accepted the Obama administration’s terms did so for reasons other than that the proposal was fair & equitable. That is hopefully what the bankruptcy judge will determine in an impartial manner. Furthermore, the renewed demonization of individuals & entities pursuing their legal rights serves no practical purpose other than pandering and, if shown to be inaccurate, may prove counterproductive to future initiatives as was discovered during the AIG bonus fiasco.

Posted by TomOfTheNorth | Report as abusive

“…Without a better government offer, [the bondholders'] best result was to send Chrysler into Chapter 11, get whatever bankruptcy dividend they could, then cash out their [credit default] swaps… In yet another irony, the [UAW]… owes much to the influence it has bought with political donations and… the same lobbyists that Obama has promised to weed out of the system…” http://www.theaustralian.news.com.au/bus iness/story/0,28124,25415739-643,00.html

“Chrysler may be worth nothing, and 55% of nothing may be worth nothing… It’s walking a very tight rope without a safety net, and a very high wire” http://www.nytimes.com/2009/05/02/busine ss/02bankrupt.html?ref=business

Posted by mtm | Report as abusive

The holdouts can still try and get a better deal, even though they are below thirty percent. What they can try and argue, I assume, is that their fiduciary rights were violated. In other words, the other parties colluded to force them to bear an unfair amount of the pain.

I don’t know if this will work, but they might be able to muck things up enough to get a better deal:

http://www.nytimes.com/2009/05/02/busine ss/02hearing.html

\”Administration officials said they believed that it was highly unlikely that a bankruptcy court judge would side with the minority when those holding 70 percent of the debt had signed off on the arrangement.

Bankruptcy law allows management of a company the exclusive right to draft a plan of reorganization. A judge can extend that period of exclusivity for 18 months, but creditors or potential buyers for a company can present a competing plan once that period expires.The United Automobile Workers union has agreed to accept company stock for 50 percent of what Chrysler owes its retiree health care fund. Most of the major debtholders, led by JPMorgan Chase, agreed to write down the debt owed to them by more than two-thirds.

But the remaining holdouts — including units of OppenheimerFunds, Xerion Capital Fund of Perella Weinberg Partners and Stairway Capital Management — refused offers to buy out their debt, forcing a bankruptcy filing. They argued that they were falling victim to the willingness of their big banking partners in Chrysler to make concessions to a government that had helped bail them out as well( NB DON ). Perella Weinberg decided late Thursday that it would accept the government’s terms.\”

And from their statement:

http://dealbook.blogs.nytimes.com/2009/0 4/27/gm-faces-obstacle-from-unsecured-cr editors/

\”We are deeply concerned with today’s decision by GM and the auto task force to offer only a small, inequitable percentage of stock to its bondholders in exchange for their bonds.

We believe the offer to be a blatant disregard of fairness for the bondholders who have funded this company and amounts to using taxpayer money to show political favoritism of one creditor over another.

Today’s posturing makes it clear that the company and the auto task force would rather discount the thousands of individual investors and retirees who own GM bonds than undergo earnest negotiations.

The current offer is neither reasonable nor adequate. Both the union and the bondholders hold unsecured claims against GM. However, the union’s VEBA would receive a 50 percent recovery in cash and a 39 percent stake in a new GM for its $20 billion in obligations; while bondholders, who own more than $27 billion in GM bonds and have the same legal rights as the unions, would only receive a mere 10 percent of the restructured company and essentially no cash.

The offer was made unilaterally, without any prior discussion or negotiation with bondholders and in spite of repeated calls for dialogue. ”

In all honesty, with the statements being made about them and their lack of standing, they might have a case. You cannot single out a particular group because you don’t like them, which is what they might well argue is happening. I’m not sure that social policy overrides their legal standing.

Since the DIP financing will come from government, government has a huge say over the result. If the minority feel they are being shortchanged, let them come up with money to buy it. Without financing, Chrysler has no value and they would only end up with less. Theirs is only a negotiating position.

Posted by Lord | Report as abusive

Chrysler was forced to go BK by the govt over a very small amount of bonds that could have been brought out 100 cents on the dollar. Total Chrysler bonds were a small 6.9 Billion. What was the real reason that Chrysler was forced into a chap 11? Was it to take the assets and private property from one person and give it to a favored group? We are a nation of laws, and absolute priority is the rule. In America a person can not have his company declare chap 11 and then sell it to his friend and wipe out his bondholders. You can not take private property from dealers and then give it to others under the cover of the Court.

Posted by jus | Report as abusive

The only bondholders who aren’t holding out at the ones that have already taken massive amounts of TARP money from the government to survive. Citibank is appears to be asking for another $10 billion this week alone!

Gee, you don’t think their judgment on what’s “an okay business deal” might be just a tiny bit in line with “we’ll do whatever the US government wants because otherwise they’ll put us out of business”?

This proposed restructuring is a travesty of the bankruptcy process. Airline employees certainly didn’t get this kind of protection for their retirements!

Posted by Steve Levin | Report as abusive

The economy maybe bad now but it paves the way for the little guy to turn around and create an empire. Let chrylser go another car company will expand or be created.

http://www.googlemenews.com

Hasn’t any one been paying attention to the big picture? Over the years Congress has created an Imperial Presidency by abdicating it’s power through legislation and not by amendment. President Obama is reluctant to prosecute torture crimes of the past administration. This President is now inserting himself in the decision making process’ that should be left to stockholders, board members and courts. This is why money was given so freely by the federal government. Now all who received are beholding to Washington. This is why the federal government refuses to allow TARP money to be returned.

For all our disdain and fear of autocrats and socialism, we are now building upon a foundation of the very same. To invest so much power in the office of one man is dangerous. George Washington warned in his farewell address to the union regarding separation of powers “Let there be no change by usurpation; for though this in one instance may be the instrument of good, it is the customary weapon by which free governments are destroyed.”. Yet this is the very circumstance we find ourselves in.

The notion that we can somehow fix broken companies and hence get people to manufacture and purchase cars, homes , electronics again and start the whole ball rolling is to deny one of the fundamentals as to why economic activity collapsed. High energy costs due to increased demand for a limited resource. Perhaps having fewer autos and manufacturers is a good thing in the long run. The industrial age has been a blight upon the planet. We cannot continue to burn fossil fuels indefinitely.

It is past time to think out of the box and chart a new path. If we do not the future holds more of the same; war ,pestilence, poverty and tyranny.

Posted by Anubis | Report as abusive

Anyuone asserting Chyrsler has a liquidation value should identify the buyers and their financiers, or hold their BS.

Posted by Lord | Report as abusive

Chrysler and GM both are broke for one reason, they don’t build cars that compete well in the market. Changing owners will not improve the engineering. Of course giving the Unions a 50% say will result in a lean mean car building machine—-not. I would be more in contempt of the sold-outs than to the hold-outs as regards to the senior debt holders. We all know the motivations of the takers of the deal and it was not out of the goodness of their hearts. Even though they have big heats–they are all stone.

Posted by Ted | Report as abusive