Chrysler bankruptcy going according to plan

By Felix Salmon
May 8, 2009

This is pretty much exactly what we wanted, right? Chrysler gets the benefits of bankruptcy — such as being able to restructure its obligations to its dealer network — while the holdout creditors, who pushed Chrysler into bankruptcy in the first place, get less than they were initially offered by the Obama administration.

I do wonder what that means for the prospects of a GM bankruptcy. On the one hand, would-be holdouts are unlikely to make the same mistake twice. But on the other hand, there are so many more of them that the collective-action problems of getting a successful restructuring done out of bankruptcy are pretty much insurmountable. I think the best-case scenario for GM, just as with Chrysler, is a quick bankruptcy with little fractiousness from bondholders. The chances of avoiding bankruptcy outright seem slim indeed: the bigger risk is that bankruptcy will drag on to the point at which GM can no longer emerge from it as a going concern.

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Comments
11 comments so far

OK, sure, but meanwhile where is the snarky blog post on the new Ben Stein / Shaquille O’Neill commercial?

Posted by Sanjay | Report as abusive

Maybe the powers that be will look up and realize that, hey, bankrupcy isn’t so bad after all. In fact, it’s the only way we can work out the tough issues and get a troubled company back on its feet.

In my dreamland, not only will GM end up in front of a judge, but the FDIC will start pounding on the doors of Bank of America and Citigroup at 5:05 PM today. Because you don’t just wake up one morning and say “I think we’ll have a Lost Decade!”–you get there one day at a time, by averting your eyes and ignoring the problems.

Posted by Craig | Report as abusive

A normal bankruptcy without government infusions will make this pass more quickly and efficiently so that the US car makers can have sustainable and profitable businesses. The government infusions will drag out this process and lead us towards a stagnation like Japan has had for the last 10+ years.

Posted by Ted | Report as abusive

Maybe GM’s creditors will get a piece of ownership comparable to their position in the debt structure this time. At Chrysler they are taking a cut and not even sharing in any future potential upside (via equity) 10% for cutting your position to near $0? That doesn’t bode well for lending to companies with a significant union presence in the future.

Posted by Rustbelt | Report as abusive

GM debtholders are not like the TARP debholders of Chrysler that rolled over on the government’s command. About 20% of the debt is held by retail, everyday investors. The remaining debt is held by institutional investors. The majority of the of the debt is not held by TARP lenders, so getting a majority to agree, which happened with Chrysler, is not going to be the case for GM. I think while Chrysler bankruptcy will go through pretty smoothly, the GM one will not. Oh, and I doubt that the UAW will get to steal the creditors money in a GM bankruptcy.

Posted by naeem | Report as abusive

How are the creditors getting less, aren’t they going to get the same deal?

nope, they are being offered 10% of the new GM company for giving up $27 billion in debt. The UAW is being offered 38% of the company for giving up $10 billion of the $20 billion owed. Oh, and they get the other $10 billion in cash. The government is getting 50% to nationalize GM. I believe that the UAW debt and the bonds being held by the creditors are equal in court, but nowadays, the law doesn’t matter anymore.

Posted by naeem | Report as abusive

I meant how are the holdout Chrysler creditors getting less. Aren’t they just going to be forced to take the same deal they were previously offered?

Oh, I thought you meant the GM holders. Yes, they are getting the same deal, which is why it makes not sense to accept the offer unless it is better than what you would get in bankruptcy.

Posted by naeem | Report as abusive

The bondholders will not approve the deal, this will go into bankruptcy court. There are no outside bidders for substantially all of GM’s assets in the 363 sale, which is obviously in this case a “sub rosa” reorganization (which was also true in chrysler, but I digress) which are illegal under the bankruptcy code. The fact that all unsecured are getting a different recovery is also problematic when almost all of the debt is unsecured. This time with no agreement by most parties, the objection to the sale will hopefully be granted and stop the madness.

The UAW contracts need to be thrown out and restructured in the bankruptcy court. These contracts cause great harm to GM, they are forced to pay out most of the employee wages even if they are not working in plants. They need to be able to lay off as many employees as they can so they can start to make money. The only way for them to get out of this mess is to lower cost. They need to wipe out everyone, the government (through equitable subordination), the pension (to the PBGC), the VEBA trust, the suppliers, and the bondholders should share the equity. This would be the fair restructuring that would happen in a normal rather than tainted chapter 11 process. That is how GM needs to be restructured to be profitable and thrive. The current plan is not profitable for GM and continues the UAW destruction of Detroit and the midwest.

Posted by Aiden | Report as abusive

Aiden – A 363(b) sale isn’t illegal under the code. The case law on the subject allows for such sales. Steve Jakubowski provides and excellent primer in this blog post.

naeem – There is a large difference between the Chrysler lenders, who owned bank loans with liens on substantially all of the assets of Chrysler, and the bondholders at GM, who are unsecured.

The Chrysler bank loans were, not surprisingly, held by a few banks and institutional investors (including hedge funds). The GM bonds are held by retail investors.

If GM does a 363(b) sale, the process will be a bit different since there is no company taking the same place as Fiat did for Chrysler. One could imagine that GM and the Administration would set up a shell company to make the purchase, and their investment banker will provide a fairness opinion on the sale. Given that the Court appears to have accepted the reason for the accelerated sale in Chrysler, I would expect a similar outcome for GM. I don’t expect the unsecureds to have much leverage in this, but perhaps they could end up with a slightly better result.

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