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Old 06-03-2009, 10:46 AM   #81
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I feel really dumb about some things. Seems like in a bankruptcy, say GM's, the company going bankrupt may survive by voiding it's debt. While that may save the company, doesn't it just mean that the debt is passed to the vendors? So GM survives but Saginaw Gear and Firestone rubber and General Steel lose 170 billion? Is the idea that spreading the debt out to a bunch of the supplier companies makes a larger group shoulder the load and maybe be able to carry it? So maybe all the companies survive?

Thinking about the talking heads saying that 170 billion in debt gets wiped out and it just seems to me to get reapportioned. Sure i'm not looking at this the right way...
Well, I'm no expert either, but I think you have it right. The debt is "reapportioned" to suppliers/investors, not "wiped out".

I think one of the things a BK does, is provide a structured and more "fair" way of reapportioning that debt. I'm pretty sure that the BK judge might say something like all parts suppliers who are owed money for past deliveries will receive 60 cents on the dollar or whatever. Now, w/o a BK judge, the big companies with lawyers and connections might get 90 cents, while the little guy gets nothing.

At least as I understand it, if more knowledgeable people know differently, please fill us in. TIA.

-ERD50
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Old 06-03-2009, 10:54 AM   #82
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It is a rare 10 year old Pontiac that isn't missing a big chunk of that glue-on plastic "styling." That 12" high injection-molded crap didn't look good when the car was new, and it sure doesn't look good flapping in the breeze exposing the rusted metal underneath.
GM, Pontiac in particular, was a big fan of "Cladding" back in the day. It involved gluing body moldings over the sheet metal skin.
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Old 06-03-2009, 11:10 AM   #83
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I believe ERD50 has it correct when talking about suppliers and passing on the debt.
This is why bankruptcy judges tend to favor suppliers in a restructuring. You have to help the suppliers along with the company, otherwise the company can't do business anyways (as they have no suppliers).
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Old 06-03-2009, 04:50 PM   #84
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Maurice, I apologize for the personal remarks I made toward you about hating American made cars. That just got under my skin. As a GM engineer (retired), I spent 34 years with the company, the last third of which were spent trying to compete with Japanese auto makers. Those last ten years were tough with top management ramming it down our throats every day about how much ground we had to make up. The eighties were really rough years. We made inroads in the 90's, still were not there but I think we finally caught up in the 2000's. I'm talking quality. We are still behind in the fuel economy game and I guess right now it doesn't mean a thing. Just trying to survive. We'll see how the new GM makes out. Maybe I shouldn't have taken your remarks so personally.

No worries, Johnnie. I can certainly relate, these days I find myself biting my tongue (or not) quite often when people bring up the finance industry.
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Old 06-03-2009, 05:58 PM   #85
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I believe ERD50 has it correct when talking about suppliers and passing on the debt.
Agreed.
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This is why bankruptcy judges tend to favor suppliers in a restructuring. You have to help the suppliers along with the company, otherwise the company can't do business anyways (as they have no suppliers).
Although in this case future GM suppliers will have President Obama and the American Tax Payers standing behind GM's credit worthyness.
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Old 06-03-2009, 07:15 PM   #86
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Thinking about the talking heads saying that 170 billion in debt gets wiped out and it just seems to me to get reapportioned.
It doesn't get reapportioned. It's gone. GM's liabilities shrink. Someone elses assets shrink by a like amount. Both sides of the equation, assets and liabilities, go "poof".
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Old 06-03-2009, 07:25 PM   #87
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It doesn't get reapportioned. It's gone. GM's liabilities shrink. Someone elses assets shrink by a like amount. Both sides of the equation, assets and liabilities, go "poof".
From the perspective of GM it is "gone". But it didn't go "poof", the suppliers and/or other creditors/investors ate it.

If you had a small company that had an accounts receivable with GM, I think it would be very real to you that it did not go "poof", it is a bill you will never fully collect. That is tough on a company that may have had no hand in the problems in GM, other than deciding to do business with them (like maybe cater a lunch or sell office supplies or some other support service not directly related to the actual business of making cars).

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Old 06-03-2009, 07:28 PM   #88
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From the perspective of GM it is "gone". But it didn't go "poof", the suppliers and/or other creditors/investors ate it.
I think we're saying the same thing. But the word "reapportioned" to me means that someone else takes responsibility for GM's liability. That isn't true. As we both said, someone loses an asset, but they don't gain a liability.
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Old 06-03-2009, 07:40 PM   #89
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In case any one missed it . . .

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A federal bankruptcy judge approved the sale of most of Chrysler LLC's assets to Italy's Fiat . . . Judge Arthur Gonzalez said in his ruling late Sunday that a speedy sale was needed to keep the value of Chrysler from deteriorating and would provide a better return for the company's stakeholders than if it had chosen to liquidate.
A federal bankruptcy judge approved the sale of most of Chrysler LLC's assets to Italy's Fiat

So an independent bankruptcy judge has now ruled that Chrysler's secured creditors aren't getting shafted. At least one creditor has appealed that ruling. If the appeals court also rules in favor of the sale, then not only will a majority of creditors have agreed this is in their best interest, but also two independent judges will have reached the same conclusion.

Is it possible the talking heads who are complaining about how badly creditors are being treated don't exactly know what they're talking about?
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Old 06-03-2009, 08:22 PM   #90
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Well, I'm no expert either, but I think you have it right. The debt is "reapportioned" to suppliers/investors, not "wiped out".

I think one of the things a BK does, is provide a structured and more "fair" way of reapportioning that debt. I'm pretty sure that the BK judge might say something like all parts suppliers who are owed money for past deliveries will receive 60 cents on the dollar or whatever. Now, w/o a BK judge, the big companies with lawyers and connections might get 90 cents, while the little guy gets nothing.

At least as I understand it, if more knowledgeable people know differently, please fill us in. TIA.

-ERD50
You have correctly outlined one of the key premises underlying bankruptcy law -- "The squeaky wheel gets the grease." Ideally, bankruptcy prevents disgruntled creditors from putting the screws to a troubled company in a rush to get paid before everyone else, on the theory that such a rush will drive a company completely out of business when it otherwise could be rehabilitated for the benefit of all creditors. The Bankruptcy Code tries to accomplish this by promoting equal treatment for creditors of equal rank (i.e. - share the pain). Like anything else in life, ideals run ahead of actuality.

Recall that there are both financial creditors of GM (the bondholders) and trade creditors (suppliers). We are discussing here the trade creditors/suppliers. The bankruptcy code, in greatly simplified form, provides a distribution of assets of the bankruptcy estate in the following order: 1) secured creditors to the extent of their security (with exceptions for carve outs, Section 506 claims and other stuff not immediately germane) 2) costs of administration of the estate (i.e the bankruptcy lawyers); 3) unsecured creditors; 4) equity holders - preferred first, then common.

Remember the "equal treatment" ideal? It is just that - an ideal. The real world is much messier. First, suppliers may have reclamation rights. Generally, that means that when there is identifiable product that has not yet been incorporated in a higher level product (i.e. - a pile of windshield wiper motors not yet attached to a car), the supplier may "reclaim" them if not paid. The supplier's reclamation rights are limited to parts supplied within a certain number of days of the bankruptcy filing (20, if I recall correctly). Suppliers don't really physically reclaim the parts. Rather, this simply means that they get paid 100% of what they are owed for that 20 day period. For more complicated machinery, it is possible that the supplier has a purchase money security interest if GM/Chrysler was to pay the purchase price over time. In that case, the supplier is a secured creditor, at the top of the heap. Keep in mind, as well, that machinery can be leased. If the bankrupt company wants to continue to use the leased machinery, it must pay cure any lease defaults and pay the lease payments going forward . Again, a 100% payment.

But what, you ask, happens to the ordinary supplier of widgets, who has no reclamation claim, no purchase money security interest and no lease? Again, it turns out that some creditors are more equal than others. Certain creditors may be designated as "critical vendors". In order to keep them supplying parts that are absolutely essential for continued operation (e.g. -- the sole source supplier of drive shafts), the debtor (GM/Chrysler) will ask the court to allow it to pay these vendors 100% on their pre-bankruptcy claims. The case law in this area changes regularly, and I am uncertain what the current state of the law is in the Southern District of New York (where these companies filed).

In general, it might be said that a big Chapter 11 bankruptcy does 2 things. With the important exceptions noted above, it shares the pain among the creditors. To the extent there is insufficient cash/assets to pay creditors, Chapter 11 coverts the old debt holders/creditors to new equity holders. It really is the only fair way to do these things.
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Old 06-03-2009, 08:26 PM   #91
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Is it possible the talking heads who are complaining about how badly creditors are being treated don't exactly know what they're talking about?
Speaking from personal experience, the unsecured creditors (suppliers) always get treated badly in these deals. Many of them will be forced to file bankruptcy themselves. They shipped product with the expectation of getting paid for it. Many were strong-armed into continuing to ship product in the weeks leading up the bankruptcy under thinly-veiled threats - loss of future business if they interrupted the supply chain. Most small businesses cannot write off millions of dollars of receivables and stay afloat.
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Old 06-03-2009, 09:30 PM   #92
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... one of the key premises underlying bankruptcy law -- "The squeaky wheel gets the grease." Ideally, ...
Wow, thanks for the detailed response Gumby.

This is what is so great about this forum, I could spend hours and not find such information from any journalist. And here it is, complete and tailored specific to my questions.

Great breakdown of the ideal versus real world, and some of the "stuff" that happens in between.

-ERD50
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Old 06-03-2009, 09:46 PM   #93
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Wow, thanks for the detailed response Gumby.

This is what is so great about this forum, I could spend hours and not find such information from any journalist. And here it is, complete and tailored specific to my questions.

Great breakdown of the ideal versus real world, and some of the "stuff" that happens in between.

-ERD50
My pleasure. I spent most of my legal career working on large Chapter 11 bankruptcy cases. You might be interested to know that I and my colleagues at my old law firm started thinking about and preparing for a GM/Chrysler bankruptcy in about 2005. My former firm is now immersed in it, while I have moved on to greener pastures (or at least more sedate ones).
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Old 06-04-2009, 08:29 AM   #94
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Is it possible the talking heads who are complaining about how badly creditors are being treated don't exactly know what they're talking about?
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Old 06-04-2009, 08:59 AM   #95
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In general, it might be said that a big Chapter 11 bankruptcy does 2 things. With the important exceptions noted above, it shares the pain among the creditors. To the extent there is insufficient cash/assets to pay creditors, Chapter 11 coverts the old debt holders/creditors to new equity holders. It really is the only fair way to do these things.
That may be true, but how many GM creditors want an equity piece of a UAW and Govt run entity? I think those are uncharted waters??
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Old 06-04-2009, 05:38 PM   #96
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Creditors would almost always prefer to be repaid their debt, in full, with interest. But if the debtor could do that, they wouldn't be in bankruptcy.

In a Chapter 11 bankruptcy, you have only three things to give creditors

1. Existing cash and assets -- obviously, if you want the reorganized debtor to be a going concern, you need to let it keep assets and enough cash for working capital.

2. New debt -- again, if the reorganized debtor is to survive, the debt must be at a level where there is some reasonable chance that it can be repaid. (otherwise it will immediately trade below par, and that's sure not good for the creditors).

3. If cash payments and new debt still haven't made the prepetition creditors whole, you give them equity in the reorganized debtor, up to and including all the new equity. Existing pre-petition equity only keeps its equity when the creditors have been satisfied or where they contribute "new value" (as you might imagine, there are huge fights over the precise meaning of these terms)


It is just a fact of life that in many, many bankruptcies, the creditors end up converted to equity holders. If you don't want to take your chances with the reorganized debtor, then you can sell your new debt and your new equity once it is distributed under the plan.
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Old 06-07-2009, 12:34 PM   #97
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Excellent posts Gumby.....I'm learning a lot! Thank you!
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Old 06-08-2009, 12:19 AM   #98
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Gumby....

But all debt is not the same.... some have security and some do not... if one is 'secured' then you would have the right to take your security out of the BK and if it did not pay it off.... then the rest is unsecured...


I used to be a trustee on a secured bond... and each year I would have to get the company to give me a security interest in all their plant, equipment, inventory, AR, etc... basically most of the company... then there were a lot of unsecured creditors who in a BK should not get paid a penny unless the secured were paid off 100%...

The way these are going (from what I read).. the secured creditors are being told... take a haircut for the good of the country.... well, if I owned the secured debt, screw everybody else (including the UAW)... I would want everything I am owed as long as there are enough assets to satisfy my debt... only the people with a higher priority than me should get anything before I get mine...

And if I were a unsecured creditor and had $27 billion invested... and the UAW was owed $20 billion... then I would want 57% of what is going to these two.... but I am being offered 36%... for the good of the country...

I think it is worse over at Chrysler.....
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Old 06-08-2009, 01:38 PM   #99
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Texas, that is the case with liquidation. However, doesn't the judge have leeway in a reorganization to take into account how well the reorganized company could function?
As I understand it (and I have no education in this, so I could well be wrong), the secured creditors immediately take second seat to whoever provides the refinancing funds. Then, the judge tends to distribute or reserve funds for employee saleries and other uses of cash that the company will need to have a shot at being profitable.
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Old 06-08-2009, 04:27 PM   #100
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Texas, that is the case with liquidation. However, doesn't the judge have leeway in a reorganization to take into account how well the reorganized company could function?
As I understand it (and I have no education in this, so I could well be wrong), the secured creditors immediately take second seat to whoever provides the refinancing funds. Then, the judge tends to distribute or reserve funds for employee saleries and other uses of cash that the company will need to have a shot at being profitable.
But that is not what is being proposed.... the UAW is not putting up any new money, just getting ownership based on how much they are owed as a general creditor...... and a secured creditor should have the right to take his security even if it hurts the other parties in the case...



News update... the Supreme Court has stopped the sale of Chrysler to Fiat... we will see what they rule....
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