haha
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Auto Bailout
posted by Adam Levitin
TARP funds are now going to be used to bail out the auto industry. Whether or not this is ultimately a good or responsible idea is something that I will reserve comment on for now. The loans' term sheet isn't out yet, but it's outlines are being reported: $13.5bn now, callable on March 30 (conveniently on the Obama administration's watch) if the automakers haven't reduced their debt by 2/3s (including via deb/equity swap--shareholders will get diluted) and worked out a competitive labor deal.
The idea animating these bridge loans is that the exploding deadline will force the automakers and their major creditor constituencies--labor, secured creditors, suppliers, dealers, and bondholders--to work out a restructuring. That's a nifty move, but it is a gamble, and as I explain below, it is a very risky one for taxpayers. The Times reports that the loan will have priority over other creditors, which should protect taxpayers/ Only problem is that I don't know how that would be possible under existing law.
There isn't any mechanism in existing law for giving new money priority over old money outside of bankruptcy, other than secured credit, and I don't think there are any significant unencumbered assets at GM or Chrysler. Therefore, even if these are "secured" loans, there really can't be priority from security unless existing secured creditors can be convinced to give up their liens (and what fool would do that?).
If the loans aren't secured, there isn't any way to give them priority under existing law, and this deal doesn't change the law. Absent a subordination agreement (and there isn't one here), if the government lends unsecured, it is on equal priority with all other unsecured creditors outside of bankruptcy, and equal priority with all general unsecured creditors in bankruptcy. Note that this is very different from the bank bailout deals where the government took preferred stock. Companies can issue preferred that has a priority senior to common. But there's no ability to do this with debt. At best, GM or Chrysler could issue senior notes (and that depends on the notes they have already issued), but these would only have priority over other bondholders, not over other general unsecured creditors. If you want to give priority to new money, the only way to do it currently is in bankruptcy.
Credit Slips: Auto Bailout
My question here is not about the auto bailout per se, or the wisdom or fairness of it. My question is about this sentence: At best, GM or Chrysler could issue senior notes (and that depends on the notes they have already issued), but these would only have priority over other bondholders, not over other general unsecured creditors.
Under current law, can a firm issue new debt, outside of bankruptcy, not secured by specific liens, that gives the new debt priority over existing senior debt? If so it seems that a bondholder is always in a very risky situation unless he has liens on something like modern airplanes or ships or locomotives or general purpose real estate or somthing that can retain its usefullness separated from the going concern.
Any comments will be appreciated.
Ha
posted by Adam Levitin
TARP funds are now going to be used to bail out the auto industry. Whether or not this is ultimately a good or responsible idea is something that I will reserve comment on for now. The loans' term sheet isn't out yet, but it's outlines are being reported: $13.5bn now, callable on March 30 (conveniently on the Obama administration's watch) if the automakers haven't reduced their debt by 2/3s (including via deb/equity swap--shareholders will get diluted) and worked out a competitive labor deal.
The idea animating these bridge loans is that the exploding deadline will force the automakers and their major creditor constituencies--labor, secured creditors, suppliers, dealers, and bondholders--to work out a restructuring. That's a nifty move, but it is a gamble, and as I explain below, it is a very risky one for taxpayers. The Times reports that the loan will have priority over other creditors, which should protect taxpayers/ Only problem is that I don't know how that would be possible under existing law.
There isn't any mechanism in existing law for giving new money priority over old money outside of bankruptcy, other than secured credit, and I don't think there are any significant unencumbered assets at GM or Chrysler. Therefore, even if these are "secured" loans, there really can't be priority from security unless existing secured creditors can be convinced to give up their liens (and what fool would do that?).
If the loans aren't secured, there isn't any way to give them priority under existing law, and this deal doesn't change the law. Absent a subordination agreement (and there isn't one here), if the government lends unsecured, it is on equal priority with all other unsecured creditors outside of bankruptcy, and equal priority with all general unsecured creditors in bankruptcy. Note that this is very different from the bank bailout deals where the government took preferred stock. Companies can issue preferred that has a priority senior to common. But there's no ability to do this with debt. At best, GM or Chrysler could issue senior notes (and that depends on the notes they have already issued), but these would only have priority over other bondholders, not over other general unsecured creditors. If you want to give priority to new money, the only way to do it currently is in bankruptcy.
Credit Slips: Auto Bailout
My question here is not about the auto bailout per se, or the wisdom or fairness of it. My question is about this sentence: At best, GM or Chrysler could issue senior notes (and that depends on the notes they have already issued), but these would only have priority over other bondholders, not over other general unsecured creditors.
Under current law, can a firm issue new debt, outside of bankruptcy, not secured by specific liens, that gives the new debt priority over existing senior debt? If so it seems that a bondholder is always in a very risky situation unless he has liens on something like modern airplanes or ships or locomotives or general purpose real estate or somthing that can retain its usefullness separated from the going concern.
Any comments will be appreciated.
Ha