Opinion

Felix Salmon

What is Thomas Lauria playing at?

By Felix Salmon
June 10, 2009

The Detroit News today bellyaches about how the Chrysler bankruptcy deal “may make raising cash more difficult for companies”. I have no idea where they got this idea, but it’s ludicrous. As the WSJ story on gadfly lawyer Thomas Lauria notes, Chrysler’s secured creditors are getting significantly more out of the existing bankruptcy deal than they would without the government throwing in its billions.

The fact that unsecured creditors (the UAW) are getting some recovery from the Chrysler bankruptcy even though secured creditors are taking a haircut is actually good for the secured creditors: it means they’re getting more than they otherwise would be able to salvage out of a liquidation. And when recoveries go up, raising cash becomes easier, not more difficult.

The Indiana pension funds who hired Lauria and brought the complaint are making very little sense:

“As I’ve said countless times, it wasn’t the investment that was made by our Hoosier pension funds that put Chrysler in bankruptcy,” says Indiana State Treasurer Richard Mourdock. “It’s been the egregious actions of the U.S. government.”

Actually, Chrysler went into bankruptcy because it ran out of money. The overwhelming majority of Chrysler’s secured creditors, knowing a good thing when they saw one, signed on to a plan which allowed Chrysler to come out of bankruptcy. The alternative would be to try to sell off Chrysler’s plants and other infrastructure — assets for which there’s not exactly a lot of bids out there.

Now, depressingly, Lauria has his eyes set on the GM bankruptcy — even though there are no issues surrounding senior creditors at all in that case: GM’s secured creditors are getting paid out in full. The fact is that the government has spent tens of billions of dollars bailing out both Chrysler and GM; bondholders of both companies are much better off as a result. They have nothing to complain about, and it’s ridiculous that anybody is willing to pay Lauria $900 an hour to try to throw a spanner in the bankruptcy works.

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Similar things were said when the government started to bail out banks, that people wouldn’t invest in them because the government might nationalize them out. Turns out the opposite happened, that the government’s backing in various forms has made it easier to raise money.

The big auto bankruptcies aren’t good examples for ordinary companies, but the government’s involvement in these huge cases has meant more money for senior creditors and thus might make it easier for a similar concern – if one exists of this size, this close to running on empty – to raise money.

Posted by jonathan | Report as abusive
 

Felix:

Have you read the valuation reports prepared by Capstone (available at http://www.chryslerrestructuring.com, Docket 52 – later version at Docket 1573)? Did you read Greenhill’s fairness opinion (Docket 173 – which specifically states that they did NO VALUATION WORK in arriving at their conclusions)?

The valuation of Chrysler in liquidation was based on a report that never had to withstand real scrutiny (but Greenhill’s CYA statement should give you an idea that they weren’t ready to comment on it – typically investment banks PERFORM valuations to come to support their opinion).

Furthermore, as pointed out in Lauria’s application to the Supreme Court (http://www.scotusblog.com/wp/wp-content  /uploads/2009/06/stay-application-re-ch rysler-6-6-09.pdf), the appropriate basis for valuation of secured assets under the Bankruptcy Code is based on how the assets will be employed post-bankruptcy (citing Justice Ginsburg’s opinion in Associates Commercial v. Rash (http://docs.justia.com/cases/supreme/52 0/953.pdf). The assets here are to be used as part of a going concern, so liquidation is NOT the basis that should be used in valuing the secured assets (rather, it should be based on their going concern value – which was never established).

I don’t understand the logic of your statement “The fact that unsecured creditors (the UAW) are getting some recovery from the Chrysler bankruptcy even though secured creditors are taking a haircut is actually good for the secured creditors: it means they’re getting more than they otherwise would be able to salvage out of a liquidation.”

Secured creditors are supposed to be paid off completely, to the value of the assets they are secured against, before unsecureds receive ANYTHING. Furthermore, to the extent that the secured loan exceeds the value of the assets securing it, the loan becomes unsecured and shares pari passu with the other unsecureds.

I don’t know how it’s good for the secured lenders to take a haircut while the unsecureds receive more than the secureds.

In this case, the VEBA is receiving consideration valued at $10.337 billion (Judge Gonzalez decided that this was a payment by NewChrysler, unrelated to the $10.5 billion the Estate owed to the VEBA, but NewChrysler is getting nothing of value in return for the payment) while the first-lien lenders are receiving $2.0 billion on a $6.9 billion secured loan.

It is highly likely that, had this case proceeded at a less frantic pace, the valuation would have been contested and the result quite different.

Of course, it is easy to speculate on what might have been, but there WAS a case to be made for the secured creditors. It didn’t help that the other holders of the first-lien loans were beneficiaries of TARP (and then there are the, unproven, charges of threats against the original group of “Non-TARP” lenders).

There is an excellent article at The Deal (http://www.thedeal.com/newsweekly/commu nity/when-hedge-funds-go-to-bankruptcy-c ourt.php) on some of these issues.

I wrote a fair amount about the case on my blog as well, including my thoughts on how the Pensioners could have prevailed (http://blog.lawrencedloeb.com/2009/06/c ould-indiana-pensioners-have-prevailed.h tml).

 

> The fact that unsecured creditors (the UAW) are getting some recovery from the Chrysler bankruptcy even though secured creditors are taking a haircut is actually good for the secured creditors: it means they’re getting more than they otherwise would be able to salvage out of a liquidation.

It’s worth clarifying that the money the unsecured creditors are getting is not coming from the secured creditors, which seems to be their claim.

 

You state:

“The fact that unsecured creditors (the UAW) are getting some recovery from the Chrysler bankruptcy even though secured creditors are taking a haircut is actually good for the secured creditors.”

I don’t see how any chain of reasoning could come up with that. Care to explain yourself ?

Posted by AndrewDover | Report as abusive
 

” The fact that unsecured creditors (the UAW) are getting some recovery from the Chrysler bankruptcy even though secured creditors are taking a haircut is actually good for the secured creditors: it means they’re getting more than they otherwise would be able to salvage out of a liquidation.”

That begs the question of why include the unsecured creditors at all. You could still do all of this without giving them a dime. Are you saying that it is the political power of the UAW which has induced the government to give Chrysler the money it needs to emerge from bankruptcy and they need to be paid off with 60% of the equity to cover for that? That’s cynical and maybe true, but it’s certainly inconsistent with bankruptcy case law.

Posted by mattmc | Report as abusive
 

Mattmc is correct — in addition, your statement that “when recoveries go up, raising cash becomes easier, not more difficult” only applies to situations where the government will pump in extra money to “bailout” the company. It doesn’t follow that the government must provide those additional funds in future structured bankruptcies. Rather, the only precedent that has been set here is that union interests take priority over unsecured creditors, and as such, companies that require union labor will have a harder time obtaining unsecured credit, given that implicit demotion in priority.

 

Felix, I love your blog and it’s part of my daily reading but this particular post is, to borrow the words of Wells Fargo’s Chairman, asinine.

Posted by Skip | Report as abusive
 

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