Sometimes, the Fly in the Ointment Has a Right To Be There
Picking up on an earlier post, it appears that the holders of Chrysler's secured debt will have their day in court -- appeals court to expedite the process. From the Wall Street Journal today:
The Second U.S. Circuit Court of Appeals in New York said it would hear an appeal by a group of Indiana pension funds challenging the sale of most of Chrysler's assets to the company's proposed partner, Fiat SpA of Italy. Oral arguments in the appeal will begin Friday, according to the court's order. Chrysler had hoped to potentially exit bankruptcy as soon as this week.
The article goes on to point out the main issue:
Senior lenders owed $6.9 billion would receive $2 billion, giving them a recovery of about 29 cents on the dollar.
The Indiana funds say that, under Chrysler's plan, creditors with less seniority, namely the UAW, would see a better recovery. The UAW's health-care trust has an unsecured claim against Chrysler for about $10.5 billion. In addition to the equity stake in Chrysler that the trust would receive, it would also get a $4.5 billion note.
An article in The Washington Post today describes the complaint as follows:
The funds, which hold about $42 million of Chrysler's $6.9 billion in secured debt, claim the terms of the sale violate their rights as secured lenders by limiting their ability to recover all of their original investment in the company.
If the debt is senior, it should be paid in its entirety before those with junior debt are paid at all. If the debt is secured, then no transaction should take place that reduces the security of the debtholders' claim. No court should be violating these basic principles, no matter how much pressure there is from the other two branches of government.
A question: This $6.9 billion in debt is referred to alternatively as senior or secured. If anyone knows which one it is (or perhaps why it doesn't seem to matter in the way this debt is described), please chime in below.
First lien credit agreement
Basically the pension fund manager contributed to part of a $7 billion loan to Chrysler through JP Morgan.
The filing is here:
http://www.scribd.com/doc/15667677/Indiana-Pensioners-Motion-to-Move-Chr...
See footnote #2.
What was the fund manager THINKING loaning pension fund money to Chrysler? The only way such an investment makes any kind of sense is if helping to prop up Chrysler back then would have preserved Indiana jobs. Or maybe the fund managers decided that Congress would bail out Chrysler if they failed and so their loan was essentially backed by the Federal government. As we know, Congress refused to bailout Chrysler (correct decision) which forced them into bankruptcy in which creditors lose their shirts because bankruptcy is designed to permit the company to survive. Loaning money to Chrysler was dodgy in the first place. It is not the kind of secure investment pension funds should be making.
IMHO, the lawsuit is a CYA by the pension fund managers. If they kill the deal and auction off the pieces, they will destroy most of the net worth of Chrysler as it now stands. The tax revenue for Indiana would take an even bigger hit not to mention even more money shelled out for unemployed workers at the Indiana Chrysler plants and their parts suppliers. Killing the deal would be a net loss for Indiana. The lawsuit saves face for the pension fund managers, but it would it is not in the best interests of the state overall.
The ruling
This is what the court ruled and why Indiana pension fund is not getting more money.
1. The court ruled that the Chrysler plan was not a sub rosa plan.
2. The absolute priority rule violated was not violated because the UAW, VEBA, and the Treasury are not receiving distributions on account of their prepetition claims but under separately-negotiated agreements with New Chrysler. So the US government bailout money cannot go to pay off claims of those who have absolute priority against Old Chrysler because that money never ever belonged to old Chrysler.
The lower priority UAW pension funds etc, are not paid by Old Chrsyler either, because those with absolute priority are not getting all their money first. UAW is getting money as part of a new contract after the old Chrysler was "sold" to New Chrysler for 29 cents on the dollar owed to those with absolute priority, which is more than they would get if the entire enterprise were dismantled and sold as scrap. Which is what would have happened absent the US government as lender of last resort.
The allocation of ownership interests in the new enterprise is irrelevant to the estates' economic interests" and that "in addition.
Established precedents have been affirmed in this case:
1. You can't circumvent the Chapter 11 process if you can't fund next week's payroll.
2. The absolute priority rule is not violated if junior creditors necessary to the new enterprise get something going forward.
3. Lenders of last resort can dictate the terms of a plan or sale so long as the terms aren't unconscionable. They have no obligation to those with absolute priority claims of the old enterprise.
Bottom line:
Don't loan money to companies that are about to go bankrupt. Fire pension fund managers that mismanage pension funds by making loans to dodgy companies.