Why we should thank the Chrysler hold-outs

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.


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