[Part II – Testing the Limits of Section 363 Sales; Part III: Will the Absolute Priority Rule Kill the Sale?]

[6/09/09 UpdateSee also my analysis of the Chrysler Sale Opinion (Part I) and (Part II).]

And so, with these fighting words by President Obama, Chrysler files for bankruptcy in the Bankruptcy Court for the Southern District of New York.  Clearly, we’re in uncharted waters as never has the Office of the President become so engaged in the restructuring of America’s largest businesses.  In supporting Chrysler’s filing, a visibly angry President Obama came out swinging, stating:

A group of investment firms and hedge funds decided to hold out for the prospect of an unjustified taxpayer-funded bailout. I don’t stand with those who held out when everyone else is making sacrifices. They were hoping that everybody else would make sacrifices and they would have to make none. We will use the bankruptcy laws to clear away remaining obligations. It will be designed to deal with the last remaining holdouts. It was unacceptable to let a small group of speculators endanger Chrysler’s future by refusing to sacrifice like everyone else.

For his part, Congressman John Dingell, the longest serving member of the House, promised that “[t]he rogue hedge funds that refused to agree to a fair offer to exchange debt for cash from the U.S. Treasury – firms I label as the ‘vultures’ – will now be dealt with accordingly in court."

The secured debt holdouts didn’t see things quite the same, obviously, and issued this statement justifying their holdout, saying:

[W]e offered to take a 40 percent haircut even though some groups lower down in the legal priority chain in Chrysler debt were being given recoveries of up to 50 percent or more and being allowed to take out billions of dollars. In contrast, over at General Motors, senior secured lenders are being left unimpaired with 100 percent recoveries, while even G.M.’s unsecured bondholders are receiving a far better recovery than we are as Chrysler’s first lien secured lenders. We have a fiduciary responsibility to all those teachers, pensioners, retirees and others who have entrusted their money to us. We are legally bound to protect their interests. Much as we empathize with Chrysler’s other stakeholders, the capital is just not ours to contribute to their cause by accepting a deal that is outside the well-established legal framework and cannot be rationalized as being commercially reasonable.

So the petition is now filed.  Let’s examine the carnage:

  • The claims of the top 50 unsecured creditors total $730 million, with total trade at about $1.5 billion.
  • The claims of the senior secured lenders total $6.9 billion.
  • The USA is owed $4 billion, secured by a third priority lien (with a first on previously unencumbered assets, having an estimated liquidation value per Mr. Manzo of 3-6% on the dollar).
  • Cerberus and Damiler AG are owed $2 billion secured by a second priority lien. 
  • An additional approximately $8.5 billion is owed to the VEBA funds that were designed to cover the costs of unionized retiree health benefits.
  • Cerberus paid $7.4 billion in May 2007 for its 80% stake in Chrysler, and lost it all.
  • Daimler paid $37 billion for Chrysler when it purchased it in 1998, and also lost it all. 

But in assessing the real carnage to existing claimants, one only has to look at the current balance sheet, filed with the petition, in which $52.6 billion in real liabilities are broken into the following categories:

  • Trade and Related Payables:  $5.7 billion
  • Accrued Expenses and Other Liabilities:  $33 billion
  • Financial Liabilities:  $13.9 billion

With the plan presently on the table proposing basically an all equity plan, except for $2 billion to the senior lenders, a $4.6 billion note to the VEBA trust, and about $1.5 billion in trade payables and $4 billion in pension obligations assumed in the sale, we’re talking about losses of about $40 billion in claim value and an additional $43.4 billion in equity value!

That’s a summary, ugly as it is.  My next post will look at the proposed sale, one that will surely test the limits of chapter 11’s 363 sale process as never before.

Finally, the most interesting of the first day motions is the so-called "critical vendor" motion.  Chrysler argues in this supporting memorandum of law that the payments of prepetition claims of vendors are justified regardless of whether the "necessity" doctrine or the stricter standard of the 7th Circuit in K-Mart is applied. Here’s the motion seeking authority to make such payments to suppliers and dealers along with supporting affidavits of Chrysler’s Chief Procurement Officer (Scott Garberding) and EVP-Manufacturing (Frank Ewayshyn) and affidavits from two independent dealers (John Schenden – Denver and James Arrigo – Florida).

Thanks for reading!  Continue here to Part II – Testing The Limits Of Section 363 Sales.  Here’s Part III – Will the Absolute Priority Rule Kill the Sale?.


5/1/09 UpdateSpecial thanks to the following sites, some new, some favorites, who linked to this post:  

Calculated Risk, Volokh Conspiracy, The Wall Street Journal, Truth About Cars, Daily Bankruptcy News (the best daily collection of links to bankruptcy-related stories around), ABI Blog Exchange, Simoleon Sense, i-Stock Analyst, Fear and Greed, and Underbelly.

© Steve Jakubowski 2009