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Old 06-08-2009, 04:34 PM   #101
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Texas, I wasn't comparing the UAW to the refinance provider, but to the interests that will allow the company to function after chapter 11.
I am not saying that it is right or not, I am just saying this doesn't seem new in the realm of reorganizations under chapter 11. Secured creditors seem to take a second seat to what will allow the company to function.
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Old 06-08-2009, 06:43 PM   #102
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Actually, once the bankruptcy case is filed, the secured creditor does not "have the right to take his security" out of the case, unless and until he can get the automatic stay lifted. Typically, so long as the debtor is making interest payments (not principal) to the secured creditor, the secured creditor will be deemed "adequately protected" (yes, it's a term of art), the automatic stay won't be lifted and the secured creditor is along for the ride whether he likes it or not.

As Zathras notes, the source of the money to make those interest payments will be the "debtor-in-possession" (DIP) lender. If financing is not available on other terms, the court may grant the DIP lender a super-priority lien, senior to the existing secured lender. Moreover, many bankruptcy courts allow a "roll-up" that results in the DIP lender's pre-petition claim also gaining a super-priority as post-petition credit is drawn.

Finally, keep in mind that even aside from DIP lending, the only thing a secured lender is entitled to is the value of its collateral. While having a blanket lien is a fairly strong position, under certain circumstances, a reorganization plan can be "crammed down" on a dissenting secured creditor by maintaining his lien and giving him payments over time the present value of which is equal to the value of the collateral at the date of the filing. In other words, the debtor can issue new post-petition debt that stretches out the secured creditor (e.g - replacing a debt due this year with a 30 year note, perhaps even with PIK'd interest. So long as the debtor's financial expert can convince the court that the present value is equal to the secured amount of the claim, the secured creditor is stuck with it).

Workout negotiations always occur against the backdrop of what the parties expect will occur in a bankruptcy. Sometimes, the rights of the parties are clear enough that everyone can agree on the probable outcome. Should that occur, they make a deal. But sometimes one or more of the parties makes a mistake or overplays their hand, and the case then files to the detriment of all but the bankruptcy lawyers.

The negotiations prior to the Chrysler bankruptcy worked precisely the way one would expect given the various parties in interest, their strengths and weaknesses. It might be helpful to review the considerations faced by each of the main players

1. The secured bondholders: While their blanket lien gives them a pretty strong hand, a bankruptcy could be bad news for them, as I have noted above. While some of the banks may be par holders, the hedge funds almost certainly bought their debt at distressed levels, say around 18-20 cents on the dollar, and the other parties know this. The other parties know that the funds can take a lot less than 100% on their claims and still make a mint.

Keep in mind that, even without the threat of bankruptcy, the bondholders probably do not actually want to foreclose. If they did foreclose, they would need to pour further additional cash into the company to keep it operating. Otherwise they are left with a bunch of closed factories and various pieces parts to sell off. Liquidation value is almost always less than going concern value.


2. The VEBA trust: 2 years ago (IIRC), the retiree health benefit obligations were transferred off Chrysler's balance sheet to the VEBA trust (VEBA = voluntary employee benefit association). In return for accepting this liability (which improved Chrysler's financial position), the VEBA trust received some cash and an unsecured claim for further contributions over time. The government cash loans in the fall required that the VEBA trust accept some stock instead of cash contributions.

While they are unsecured creditors, the VEBA trust has one very powerful weapon in the ability of the UAW to strike. That right is not lost in bankruptcy, and if the union strikes, the company crashes and everyone loses. It would be a pyrrhic victory, no doubt, but is is a potent threat.

3. The government: as a consequence of its cash infusion last fall, the government is the largest unsecured creditor. Its strength comes from the fact that it is the only real source of DIP financing in a bankruptcy. Any post petition lending will be senior to the existing secured creditors, and the government may be able to get a roll-up as well.

I have no inside knowledge about the negotiations, but it appears that the government essentially was willing to subordinate its unsecured claim to the VEBA trust. The main sticking point was precisely how much profit the secured creditors (i.e. hedge funds) would make, given that they almost certainly bought at distressed prices. At some point, the bid/ask spread could not be closed and the secured creditors decided they would take their chances in bankruptcy, so the bankruptcy petition was filed. It was a giant game of chicken and no one swerved.

These negotiations are never pleasant. The stakes are high and each side threatens the other with all the weapons at its disposal. Usually, cooler heads prevail, but often not. Hence a large industrial Chapter 11.

Many people may have a philosophical objection to the government loans in the first place. I personally think the money was wasted and the two automakers should have filed bankruptcy last fall. But given that government was the largest unsecured creditor and the only likely DIP lender, the negotiations proceeded precisely as one would expect. The parties played the hands they had and the result is not unexpected. I think the hedge funds overplayed their hand, but we shall see.
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Old 06-08-2009, 11:26 PM   #103
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Gumby...

Very good analysis... like always from you... and I do not think I said that they would get all of their money back... just that they 'should' get theirs back prior to the unsecured...

But not all of the secured creditors were hedge funds, hence the Indiana (or is it Illinois?) pensions filing their objection...

the big winner in this is the UAW... they got a very sweet deal... if the company can make it.... drive the company into the ground with high wages and benefits (well, along with crap management)... and get 60% of a company at the other end with no major debt...

I am real interested to see if the Supreme Court will hear any arguments or the stay was just to give them time to do research and then say "Thanks, but no thanks"....
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Old 06-14-2009, 10:15 AM   #104
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... and I do not think I said that they would get all of their money back... just that they 'should' get theirs back prior to the unsecured...
Except you keep overlooking the fact that the terms of the reorganization plan were agreed to by more than 90% of secured creditors. While you're certainly entitled to your point of view, I think it's safe to say that your opinion, as an outsider with zero skin in the game, is somewhat inferior in this case to the opinions of the near majority of secured lenders who decided this was in their best interest.

I'd also note that the small minority of secured lenders who objected had their day in court and lost three times.
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Old 06-14-2009, 02:30 PM   #105
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Except you keep overlooking the fact that the terms of the reorganization plan were agreed to by more than 90% of secured creditors. While you're certainly entitled to your point of view, I think it's safe to say that your opinion, as an outsider with zero skin in the game, is somewhat inferior in this case to the opinions of the near majority of secured lenders who decided this was in their best interest.

I'd also note that the small minority of secured lenders who objected had their day in court and lost three times.

I think most agreed because they were receiving TARP money and were up against the government... better to get the percent they got than to fight and get nothing (or less than what they got)...

As an example... most banks paid off on the various Enron lawsuits... billions of dollars... and IIRC, Citi fought and won... the banks took the easy way out because the cost of losing was 'bigger' than the cost of settling... having a cram down from the gvmt is easier to agree to than fighting them.. remember, most are regulated by the gvmt...

Agree about their day in court... they lost. I wonder if the rulings would have been the same if most of the senior debt objected.... probably not


I still think it is a sad day when the gvmt takes over the car companies and is a 35% owner in a major bank (not talking about when they close one down to sell it off because it is BK)...
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Old 06-14-2009, 04:06 PM   #106
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I think most agreed because they were receiving TARP money and were up against the government.
It is impossible to know the lenders motivations in this case. Conflicts of interest that were present with TARP banks certainly clouds the situation. But Chrysler is not the only example from which we can gain insight. In GM's case, the "TARP" bank secured creditors are getting 100 cents on the dollar in cash (obviously they weren't extorted into taking something less in GM's case, and, therefore, probably not in Chrysler's either). Meanwhile, unsecured bondholders for GM are agreeing to a deal that is in some ways similar to the Chrysler deal. The difference here, though, is that GM's large unsecured creditors are not TARP banks, they are mostly mutual funds, pension funds, and hedge funds.

So when considering the facts from both the GM and Chrysler cases, the evidence suggests that creditors are taking the option they believe is in their best economic interest. Which is as it should be.


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better to get the percent they got than to fight and get nothing (or less than what they got)...
Yes, that is exactly the point. With government help, secured creditors have higher recovery expectations than they would without government help. It's hard to claim they got treated unfairly when they end up better off.

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Agree about their day in court... they lost. I wonder if the rulings would have been the same if most of the senior debt objected.... probably not
You're absolutely right. If a majority of secured creditors didn't agree, the deal would have been DOA. But that is just as it should be. The only way someone can have a legitimate problem with that is if the creditors were somehow forced into taking a bad deal. As outsider's we'll never truly know, but the evidence from the GM case argues otherwise.
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Old 06-14-2009, 10:46 PM   #107
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. . .obviously they weren't extorted into taking something less in GM's case, and, therefore, probably not in Chrysler's either.
I don't see how you get to this.

Anyway, the Chrysler albatross is now around the neck of the UAW. There's little doubt the company will fail--if Daimler couldn't make a go of it, what chance does FIAT (snicker) have? But, again, let's look ahead at who will feel the pain when the company dies:
FIAT: Nope. The didn't put a nickel into the deal. They'll get a foothold in the US and start selling their cars here.
US Government: A major equity holder. They'll take a bath. Suckers! Oh, wait, that's you and me. . .
UAW: Yep, they'll have a big hole in their pension and health care funds. Seeing what we've seen to date, does anyone believe this government won't be there to bail them out with taxpayer money? Looks like we get that bill, too.
Canada: For a nation that enjoys pointing out the missteps of their neighbor to the south, they sure picked a bad time to decide to follow the lead of the US government. Maybe the geniuses in DC will decide to make them whole, too. Hey, it's only money.
Private Equity holders: Unlike everyone else above who were in this for pure, wholesome, altruistic reasons, these capitalists were trying to exploit the situation! They'll lose every penny and no tears will be shed inside the beltway.
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Old 06-14-2009, 11:12 PM   #108
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Canada: For a nation that enjoys pointing out the missteps of their neighbor to the south, they sure picked a bad time to decide to follow the lead of the US government. Maybe the geniuses in DC will decide to make them whole, too. Hey, it's only money.
Damn, I hope DC fixes us up. Stupidest thing the gov't has done.
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Old 06-16-2009, 08:10 PM   #109
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I don't see how you get to this.
Maybe it helps to look at the whole sentence . . .

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In GM's case, the "TARP" bank secured creditors are getting 100 cents on the dollar in cash (obviously they weren't extorted into taking something less in GM's case, and, therefore, probably not in Chrysler's either).

So I "get to this" conclusion because they (meaning the TARP banks) got 100 cents on the dollar, including accrued interest. They couldn't have done better under any other possible scenario. They, in fact, aren't entitled to any more than they got. So getting the best possible outcome forecloses the possibility that they were forced to take a worse outcome.
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Old 06-17-2009, 04:43 PM   #110
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Maybe it helps to look at the whole sentence . . .
.
Right, your "whole sentence," which I did read, says that because the Chrysler creditors were not extorted (highly questionable, IMO), it is likely that the same is true WRT GM. The government's behavior in one case is not necessarily indicative of what they are doing in others.
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