Tuesday, June 02, 2009

Chrysler Re-redux

After posting this reflection on the Chrysler creditor railroading Sunday, we received a follow-up email from our outsourced restructuring specialist - we'll call him Starting Tackle for giggles.

At the beginning of Sunday's reflection, TILB included a preamble that tried to put up the only possible argument we could conceive of in defense of The U.S. Treasury's sodomy of secured creditors:
I will offer the one counterpoint that I've heard to all of this that at least gives me pause. The counterpoint is that, in the end, all of the creditors accepted the re-org voluntarily (defining "voluntary" in the broadest possible sense). Further, while there has been outrage about the UAW receiving 55% of the re-org'd company as a junior creditor, they in fact did not receive 55% as a junior creditor; in essence, the U.S. Treasury received it and chose to give it to the UAW which is completely within their rights.
Starting Tackle responded to my Devil's Advocate argument with the below. It is fairly clear Starting Tackle knows more about this than we at TILB, so you should read and respect his voice.

A couple of points for [TILB] on the counterarguments that give [them] pause (I wouldn't lose sleep over them):

Not all the creditors accepted this voluntarily.

Chrysler is not a reorg, but technically a sale. As such, one must separate the interests that Treasury has/had in the Chrysler estate from the interest it will have in New Chrysler. Same goes for the UAW. The Chrysler estate and New Chrysler are separate and distinct entities. UAW doesn't get 4.6B note and 55% of the company because they were a junior creditor, or because Treasury gave the UAW a portion of their recovery from the Chrysler estate, (which as [TILB] points out, would be within their right to do). UAW gets this value because that's how "whoever" decided that New Chrysler should be capitalized. (This is the whole problem with this case - the fact that this is a "sale" and not a reorg allows for the manipulation of absolute priority because the "buyer" can capitalize itself however it chooses. The practical reality, of course, is that at these values there really is no "buyer" and so this is a sub-rosa plan that violates absolute priority.)

Under absolute priority Treasury is entitled to nothing for their third lien claim because the first lien isn't being paid out in full, to say nothing for the second lien held by Cerberus and Daimler. So Treasury can't be transferring value to the UAW based on their existing claim in the Chrysler estate - based on the purchase price being paid Treasury is an out-of-the-money creditor. That is why I said "I fail to see a contribution from the UAW that justifies receipt of a $4.6 billion note and 55% of the stock issued by New Chrysler". As far as I can tell, the UAW isn't paying dollars into New Chrysler for the note or the equity they are receiving in this deal - they just get it.

If this was a plan of reorganization, this wouldn't be allowed. Under a plan, the value of NewCo would have to follow absolute priority, or at least resemble it (since more senior creditors can take less than owed under absolute priority to buy off junior creditors and get a plan confirmed). If this was a real sale (or at least anything approaching fair value for the assets was paid), how Treasury chose to capitalize New Chrysler wouldn't be nearly as big an issue because New Chrysler would be putting fair value into the Chrysler estate in the transfer/sale of assets. That fair value would be distributed among Chrysler's creditors according to absolute priority. But because Treasury is paying so much less than FMV for the assets, the sale is really a sham and the value is just being handed to the UAW.

We will make two brief Devil's Advocate statements (everyone knows where TILB stands on this matter):

1) sure, not "all" creditors accepted this voluntarily ("voluntarily" defined in the broadest possible sense), but over 90% of secured creditors did and that is as close to "all" as can be practically hoped for; and

2) we would argue from a practical non-legal perspective, part of Starting Tackle's point is a distinction without a difference - whether The U.S. Treasury gets its shares then gives them to the UAW or simply proposes a plan that bypasses that intermediate step and simply grants the UAW its ownership without touching Treasury hands doesn't particularly matter in the end. Of course, the legal ramifications are another story as the path matters to The Law.

Now I must excuse myself; your humble author needs to go home and draw a hot bath. TILB must cleanse itself of its festering, soul destroying defense of public interference in private endeavors, even as a Devil's Advocate.

Wish me health.


Let us know your view on Starting Tackle's take on the abrogation of contract law and its ramifications on the cost and availability of future lending!

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