Chrysler's creditors make first objection

Source: Detroit Free Press

Chrysler's creditors make first objection
BY JUSTIN HYDE • FREE PRESS WASHINGTON STAFF • MAY 4, 2009


NEW YORK -- A group of Chrysler's creditors raised their first legal objections to the automaker's bankruptcy plan today, saying the sale to Fiat was "patently illegal," and that the case should not move forward until the automaker and the U.S. Treasury acknowledge the creditors' rights.

The group holding about $1 billion in Chrysler debt also contends that the reorganization plan was "incomprehensible," paying off about $25 billion of claims on Chrysler -- including the UAW retiree health-care trust fund -- while giving lenders $2 billion to satisfy $6.9 billion in secured debt. The creditors argue that the $2 billion was less than Chrysler would be worth if the automaker was liquidated.

Calling itself the Chrysler Non-TARP Lenders -- mainly investment firms that have not taken money from the financial industry bailout -- the committee also accused the Obama administration of wrongly using bankruptcy for political gain, contending that the government could not use money from the $700 billion financial industry bailout to keep Chrysler operating in bankruptcy.

The deal forces Chrysler to "manufacture the type of smaller cars the Government wants manufactured, satisfy the demands of union laborers, and protect the Government’s investment in Chrysler – all components of a political agenda imposed on Chrysler’s management," the group said in a filing today.

Read more: http://www.freep.com/article/20090504/BUSINESS01/90504013/Chrysler+s+creditors+make+first+objection

Creditors have a right to receive at least as much in a Chapter 11 as they would in a Chapter 7 liquidation. Furthermore, secured creditors have a right to receive at least the present value of their collateral. Finally, a company may not pay off unsecured creditors in full while proposing to "cram down" secured obligation.

In summary, we've been sold a bill of goods by Geithner et al (beginning to notice a trend?)

For the property to have value, there has to be someone to purchase it. No one is going to buy the factories or the equipment inside.

All that remains of value is the inventory and one seems to interested in that these days either.

"No one is going to buy the factories or the equipment inside."

And who is going to buy equipment to make cars if no one is buying the cars that are already being made?

I live in the Cleveland area, once the manufacturing capital of the world. There are thousands of empty building, once dedicated to manufacturing, sitting all around this city. They are just sitting there waiting to fall in.

If there isn't a buyer, there isn't a value.

Obviously, there are interested parties.

may or may not be interested in the assets, but you cannot infer that from their current involvement alone.

"May or may not"

So you cannot infer either way.

self evident from "may or may not" and also because I was not posting in a vacuum. I was responding to your statement that implied that the assets must have buyers because Fiat is involved.

maybe a few of the more modern US facilities too.

It's the tooling, machinery, and IP.

There are many folks in China that would love to buy the industrial equipment.

Also someone else would love to make Jeeps. There will always be a market for at least the Wrangler. That brand is worth something (remember Chrysler bought it from AMC many moons ago.)

If you are a first priority creditor why take 30 cents on the dollar when you have a fiduciary duty to get a dollar on the dollar?

"If you are a first priority creditor why take 30 cents on the dollar when you have a fiduciary duty to get a dollar on the dollar?"

Lots of reasons. The so-called secured creditors may not be fully secured; there may be defenses to some of the provisions in the loan documents, or other defenses (e.g., unclean hands); the value of the collateral may deterioriate while the parties argue and sue over these issues; the value of the collateral may be contested, especially as to things like goodwill of a brand name; proceedings may be protracted and on and on and on. I don't know about 30 cents on the dollar, but, then again, is that really a dollar, or do we have to litigate that issue?


Secured creditors compromise in bankruptcies all the time because things are usually pretty messy all the way around by the time a debtor hit bankruptcy court.

if Chrysler were repaying its loans. In a liquidation, of course, they would get the money as soon as the assets were sold and any priorities were paid. And, as far as I know, any sale of Chyrsler would be subject to its existing obligations.

Inasmuch as we don't know what the loan documents and the reorganization plan say, we don't really know what is going on. We may well have been sold a bill of goods. On the other hand, I would never assume that large, fully secured creditors would just roll over just because the debtor filed bankruptcy. I don't think Geithner assumed that, either.

So, I expect more facts to come out, from both sides. I'll try to withhold judgment until then.

:shrug:

"On the other hand, I would never assume that large, fully secured creditors would just roll over just because the debtor filed bankruptcy."

Indeed, these creditors' objections are the subject of the OP.

"I don't think Geithner assumed that, either."

Right. That's what I was implying--that the Obama admin's rational for BK was a pretense, since the offer they made to Chrysler's creditors outside of BK is in all likelihood less than these same creditors will receive in BK. In addition, one may not avoid secured obligations in order to pay off unsecured obligation (such as so-called "legacy" costs,) as the Obama admin implied. Chrysler's pension benefits will be avoided, and will be assumed by the PBGC at no more than $0.50 : $1.00.

"Being sold a bill of goods" means being lied to...

Instead of assuming I intended to contradict, trying reading your post and my post together, as though we were able to converse normally:

Romulux: "Creditors have a right to receive at least as much in a Chapter 11 as they would in a Chapter 7 liquidation."

No elephants. " In a Chapter 11, though, the creditors get paid out over time, just as they would if Chrysler were repaying its loans. In a liquidation, of course, they would get the money as soon as the assets were sold and any priorities were paid. And, as far as I know, any sale of Chyrsler would be subject to its existing obligations."

(That was intended to supplement what you had posted, not to contradict.)

Romulux: Furthermore, secured creditors have a right to receive at least the present value of their collateral. Finally, a company may not pay off unsecured creditors in full while proposing to "cram down" secured obligation.
Romulux: "In summary, we've been sold a bill of goods by Geithner et al (beginning to notice a trend?)"


No elephants. Inasmuch as we don't know what the loan documents and the reorganization plan say, we don't really know what is going on. We may well have been sold a bill of goods. On the other hand, I would never assume that large, fully secured creditors would just roll over just because the debtor filed bankruptcy. I don't think Geithner assumed that, either."

Romulux: "Right. That's what I was implying--that the Obama admin's rational for BK was a pretense, since the offer they made to Chrysler's creditors outside of BK is in all likelihood less than these same creditors will receive in BK. In addition, one may not avoid secured obligations in order to pay off unsecured obligation (such as so-called "legacy" costs,) as the Obama admin implied. Chrysler's pension benefits will be avoided, and will be assumed by the PBGC at no more than $0.50 : $1.00."

No elephants: So, I expect more facts to come out, from both sides. I'll try to withhold judgment until then."

Romulux: "Being sold a bill of goods" means being lied to...

no elephants: Thanks. I do know what being sold a bill of goods means generally. But, I repeat: I don't think we have enough facts from both sides yet and I will try to withhold judgment until we do.

It was simply a conversation. It doesn't always have to be a battle.

"It doesn't always have to be a battle."

Agreed. My apologies for being abrasive. It's a self-defense mechanism around here.

:toast:

creditors who objected. He really should have known better or perhaps was not fully informed on the nature of the debts

approve of everything Obama does, but everyone who has spoken to him about anything says that he gets the facts and is very thoughtful. And we know he is smart because dummies don't get elected Editor in Chief of the Harvard Law Review and get graduated with honors in the bargain. Put that combo together and I have to believe he knows what he is talking about.

that secured creditors are ahead of unsecured creditors in line

"By attacking the secured creditors? I fully expect them to win in court, its black letter law"

Please read the parent to this subthread, and you'll see that I said the exact same thing.

extent that their debt is fully collateralized. If I lend you $10 and take $15 worth of collateral, I am fully secured. If I lend you $10 and take $8 worth of collateral, though, I am an unsecured creditor for $2 and a secured creditor for only $8 (somewhat less in reality, given expenses of bankruptcy and expenses of liquidation, but let's ignore that for now). A similar situation occurs if the collateral is worth $10 when I take it, but the value deteriorates over time.

One very important piece of information that I lack is the true liquidation value of the assets. Without that, we don't know whether the so-called secured creditors are fully secured or not.

There are other important pieces of information that we don't have yet, but waiting for sufficient information to make a reasonable assessment of a situation does not seem to be the vogue on message boards.

(not the least of which because the gov't bailing out both the creditors and the debtors involved in the case creates massive distortion in the "free market" for said assets.)

At any rate, the liquidation value of the assets is a question of fact that will need to be either:

a) litigated; or
b) negotiated.

Either method will take some time. Thus, the idea that bankruptcy could be "over in 60 days" (which is how the Obama admin represented it,) is an infantile fantasy believed only by the most credulous.

Is Obama trying to be the good cop with the UAW?

The time to roll the UAW was before going to BK court. You realize that in a Chapter 11 a secured creditor may force a liquidation if they are getting screwed?

the most. But admitting this is not politically feasible. So he posed bankruptcy as a threat to these "holdouts", when, in actuality, these self-same "holdouts" stood to make more in Bankruptcy that outside.

"The time to roll the UAW was before going to BK court. You realize that in a Chapter 11 a secured creditor may force a liquidation if they are getting screwed?"

You don't understand how bankruptcy works.

a mind reader (nor, for that matter is any other DU poster).

As I posted several times on this thread now, we don't have many facts to go on and I am trying to withhold judgment until we have more.

From the May 1 NYT:

"There's zero chance this group will be able to get anything more in bankruptcy court given that 90 percent of the lenders are lined up against them" said a hedge fund manager
who owns about $10 million of Chrysler's secured debt.

it's 70% That's still a high percentage, though.

http://www.freep.com/article/20090504/BUSINESS01/90504013/Chrysler+lenders+win+one-day+delay

Chrysler lenders win one-day delay
BY JUSTIN HYDE • FREE PRESS WASHINGTON STAFF • MAY 4, 2009


NEW YORK -- U.S. Bankruptcy Judge Arthur Gonzalez delayed a hearing on Chrysler's plan to sell its assets to a new Chrysler-Fiat partnership after objections from at least two of the company's lenders that they had only had a few hours to review the plan.

Today's hearing also included a request from the lawyer representing the lenders opposing Chrysler's plan to keep their identities secret for some time, saying the investors who were public had received death threats.

Gonzalez will now begin hearing the plan at 2:30 p.m. Tuesday. Chrysler had said it would file the plan Friday, but didn't enter it into the court's computer system until Sunday night. The plan lays out the process by which Chrysler-Fiat will buy most of the assets of Chrysler in return for $2 billion to settle $6.9 billion in secured debts.

The objecting lenders maintain that the Chrysler-Fiat sale wrongly trumps their rights and runs afoul of bankruptcy law. Thomas Lauria, the attorney for the objecting Chrysler lenders known as Non-TARP Recipients, said the investors had simply not had enough time to review Chrysler's filing.

Lauria said while the group included two known members -- Oppenheimer Funds and Stairway Capital -- it had other members who wanted to remain unknown for some time longer.

more...

so to perhaps a minor extent it's one group of pension funds against another. This may be true of some of the other big investors that contain pension funds.

Chrysler doesn't have much without Fiat. The local news reported that almost all of the vehicles discussed in Chrysler's viability plan depend on Fiat technology. So without Fiat, Chrysler will likely be screwed.

get more in Chapter VII than this deal. They could also just want a better offer.

Anyway, they'll fight for their claim in court which is how it should be.

GM will be in the same place soon because the deal their bondholders are currently voting on is way worse than the deal the Chrystler bondholders were offered. There's no way that offer gets enough votes to go through. GM has 100,000 bondholders and they'll vote no overwhelmingly.

Not to get screwed. The secured creditors can be sued for violating their fiduciary duty to their investors.

so that they don't get screwed? That sounds fair.

I think some of the hedge funds are simply greedy and they think that they would get more from Chapter 7 than Chapter 11.

There are pension plans and charitable endowments behind those secured bonds. States, cities and unions all invest in secured debt. They have both a legal right and a legal obligation to protect the people who invested that money in Chrysler.

more important than the workers at Chrysler? There are pensions at stake in Chrysler too. People's livelihoods will be destroyed by Chrysler going into Chapter 7. These are the companies that refused to negotiate with Chrysler. They made the CHOICE to force Chrysler into bankruptcy and now they're bitching they might not get enough. Hopefully the judge allows the Fiat merger to happen and I hope these companies get even less than they would've by negotiating before bankruptcy.

than the people who's retirements rest with Oppenheimer? Chrysler was not forced into bankruptcy. They have had problems for many years and this was just the last domino to fall.

These companies WANTED Chrysler in bankruptcy (whether you want to admit that or not) and now that they are, they're bitching about that too. I don't see how a deal with Fiat could be illegal. It's just the investment firms trying to dig themselves out of a hole they created by making a bad investment.

Why did these companies WANT Chrysler in bankruptcy?

Also, refer to post 28.

they could get a better deal in bankruptcy. According to ABC news, debt holders were being asked to take 29 cents per dollar. If a company thinks they can get more in bankruptcy (say 50 cents per dollar), you don't think it's likely that the company would prefer bankruptcy? Chrysler needed to negotiate with all debt holders in order to satisfy President Obama's auto task force. Some of these companies, including the ones in the this article, were hold outs. Therefore, they pushed Chrysler into bankruptcy by refusing to negotiate.

The investment firms/hedge funds were, indeed, legally within their rights to refuse to negotiate. President Obama, however, asked EVERYONE to make sacrifices to ensure the survival of the US auto industry. I don't believe these companies are heeding Obama's call to make sacrifices.

investors which include 401K, state pensions, etc. You can't blame them for trying to do that. If my retirement was with them (and some may be) I would hope that they would fight tooth and nail for me.

and, therefore, I will be hurt too (already unemployed and the job market won't get any better with Chrysler gone). Liquidation is what will happen if the Fiat deal in ruled illegal by the judge. So I hope Chrysler fights back tooth and nail. Hopefully Chrysler comes out on the wins side of this decision.

This is tough on all sides.

Just where is the money going to come from for future secured bonds if investors don't have confidence that contract law will be upheld? Secured bonds are a win-win for both businesses that need a cash influx and investors who want a degree of security.

The proposed settlement puts the secured creditors after the unsecured creditors, who were basically going to get paid in full at the expense of senior secured creditors. That is not how bankruptcy works. OBTW, the secured creditors had by and large agreed to significantly discount the debt, so its not as if they were not losing out too. If Oppenheimer and others did not object, they would have been sued (quite correctly) for not doing their fiduciary duty. The bankruptcy court should realign this to properly, put the secured creditors at the front of the line as legally required. It won't take that much to do it and then things will proceed.

The reason the recalcitrant investors are bitching is because they take a lower rate of return for absolute priority.

If the hedge funds agreed to the plan they will get sued for breach of fiduciary duty. It is a guarantee.

The unions have been clawing for small change for years and not seeing the big picture, not alerting their members to what was going on. The unions were talking about going one direction, while their members were, in a surprising number of cases, voting for conservatives like Reagan.

Working people put Bush into office and now working people are suffering because of Bush's policies and illegal activities.

Aren't some invention to screw the little guy. Those bonds allowed Chrysler to pay their employees and provide benefits.

Here's hoping the bankruptcy plan is quickly moved forward by the judge.

Devils advocate alert:

How can we, on one hand, have a capitalist system of for-profit enterprise - one that is built on credit - and then be angry when companies fight for money that they are rightfully owed? If was told that I would only be payed 30% of what I was owed, I'd fight that too.

Back to me:

This underscores a broader problem with plunder capitalism that lacks any sort of responsible regulation or accountability. No, creditors are not technically wrong for wanting to recover as much money as they can from what they are owed, and they are certainly right to want to have a say in negotiating that. If that process is unsavory to us, then perhaps we should be thinking about are capitalistic system that has run amok, or focus specifically on the credit and financial sectors and how they have amassed so much power.

Chrysler workers are losing health care, pensions, and jobs. Debt holders are losing money they were owed. That's just what happens. The hedge funds/investment firms wanted Chrysler to go bankruptcy because they thought they would get more money that way. If that turns out not to be true, too bad.

I guess these investment companies made poor investments. Why should we feel bad for them?

They made poor cars rather than investments. Why should we feel bad for them? That logic works both ways.

It's not true, no matter how many times you say it.

A lot of Chrysler's issues have nothing to do with the company. They were restructuring just fine until the recession happened. Now, in large part because of the financial institutions that to this day get special treatment, people can't get credit to buy vehicles. Throw in legacy costs, horrible trade policies, and the burden of providing health care, Chrysler has tons of things making it more difficult to compete.

I will never understand why people on DU defend investment firms, hedge funds, and banks so forcefully but completely trash the auto companies. I guess that's what passes as "progressive" on DU.

Boy do you have the wrong guy. I am a staunch defender of current American autos, but there was a time when Chrysler made less than stellar autos and that led to the general perception that they made poor cars (anyone remember the dodge shadow?)

Probably the worst decision that was made was allowing the merger with Daimler who really drove Chrysler into the ground. Maybe they should ask Dr. Z abotu that. My only point was that Chrysler's bankruptcy is the end result of many years of events.

I saw on the news that Chrysler had one of the lowest cost structures in the auto industry before the merger and now they have one of the highest. Chrysler definitely got the bad end of that deal.

I'm sure Dr. Z was well taken care of though. I've worked for a German company before. It was no fun, believe me.

lend you ten dollars and I get to hold your (real) diamond ring unless and until you repay me the $10, I have not made a bad investment at all.

widows and orphans (or, in this case, both), have power in bankruptcies because they lent money and took collateral to secure the debt. It is nothing that requires looking into. (Why they got the TARP, of course, is a very different issue from why they have power in a bankruptcy case, but we pretty much know that, too.)

In any bankruptcy, secured debtors are paid first. Anything left over goes to unsecured debtors.

If this rule is not applied consistantly and amicably, you will completely destroy financing for businesses and people in the country.

If you don't understand the difference between secured vs. unsecured debt, then please look it up.

This is a huge deal and I hate to say this but the proposal put together is not good for the future of this country if it's implemented the
way it stands now.

secured creditors are being bypassed in favor of unsecured ones. Its illegal and its wrong. The settlement will have to be restructured and the president needs to understand what the real terms are before he embarrasses himself again on this matter.

one being the non-TARP group. There are other secured creditors, but we have not heard why they accepted the plan, nor have we heard why the debtor believes the secured creditors should accept the plan.

My guess is that this plan is over 100 pages (at the very least) of opaque legalese that no reporter is actually wading though.

There was a claim yesterday by one of the lawyers involved of some serious Whitehouse strong arming in this. He did make it to the court which means the lawyer is willing to take on the Whitehouse. Not taking sides on it, but its scary and very disappointing if its anywhere new true

different facts and/or quotes from the same press release?

As far as being scary, that is premature. The thing has just gotten into court. All the resources of the federal judiciary, right up to the Scotus, are still available to all parties.


Your other posts on this thread indicate pretty clearly where your sympathies lie, so you'll excuse me if I don't buy that you are not taking sides. (Not saying the non-Tarps are wrong. I don't have enough data yet to form an opinion, one way or the other.)

I read that the lawyer filing the suit is a Democrat and he claims to have donated $10,000 to the Democrats last year.

Just by Obama saying the creditors were being selfish and greedy, is cause for concern.
That is NOT how the President should word deals of this nature. It means you have to be politically connected
to get money.

I'm a bond holder with other companies, I don't want the President to call me greedy because I'm not politically connected.

I do hope this get's taken care of properly in the courts.

MANY Democrats have been contributing all they could to Democratic candidates and/or the DNC in the past few years. I don't think you should attempt to imply that something is amiss because someone who probably makes maybe $250K a year (conservatively) donated money to his favorite political party--especially when his favorite party is supposedly yours and mine. (If the Democratic Party isn't your favorite party, you don't belong on this board.)

Besides, if banks are not politically connected, I don't know who is.


As far not getting money, you know perfectly well that the creditors are going to get money. There is no question of that. The questions are how much money and whether there is room for compromise. Those are almost always the questions in any bankruptcy.

As far as getting called greedy, Presidents jawbone all the time. I think it was Truman who was notorious for it, but it happens. And maybe Obama could have chosen different words, but if that is an issue for you, just remember what kids say: "Sticks and stones may break my bones, but names will never hurt me."

disadvantages creditors.

We sometimes tend to assume that a secured creditor is fully secured, but that is not always the case. For example, if the most that the creditors would net from a liquidation is $1.8 billion and they will be getting 2.6 billion, maybe plus interest, then the plan is not bad for creditors, regardless of how much they are owed in theory.

I need more facts before drawing conclusions.

If its the unsecured creditors supporting the original plan that is no surprise since it is shafting the secured creditors ahead of them in line.

of the creditors changed position. (I refer you to the article because the article presents info in several different ways, but it is safe to say that most of the secured creditors went along with the plan.

None of that is really the issue, though. The issue is, how much would the secured creditors truly NET in liquidation vs. the present value of what the plan would give them over time. I know the secured creditors are claiming that they would get more in liquidation, but no one is giving hard numbers or details. So far, we seem to know only the negotiating stance of the non-Tarp creditors' group.

and the President attacked those who would not go along.

The Tarp group may have only accepted this deal because they were forced too.

That is my biggest fear and I hope isn't true.

creditors because they are a massive and well funded lobby. Enough money is involved here that the case will go to the SCOTUS if necessary and the SCOTUS skews conservative. I think fear is premature. And you do your physical state no favors with it, so try to hold off with it.

That includes buyers of US Government debt as well.

and selfish. Sadly, I guess I'm now considered greedy and selfish by the President I voted for.

Obama know that you feel he is off base.

expect to be repaid?

I actually work for a living.