Chrysler Files Bankruptcy - Part I: Assessing The Financial Carnage
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).
5/1/09 Update: Special 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
"....visibly angry President Obama"
Obama is a good actor!
The "critical vendor" motion allows Chrysler the right to pick and choose which vendors of pre-petition vendors to pay. This seems totally in opposition to the spirit of BK law of equal treatment of similar classes of debt. The big suppliers will be paid and the small guy flower and sandwhich shops etc. will not be paid.
From a practical standpoint the Chrysler case is a special case and things will be done that are not "normal" legally. The problem is that the law does not and can not ignore precedent and the law. What special treatment that is given Chrsler will be cited by future bankrupts as precedent.
But IMHO, the flower and sandwich shops are far more likely to have a larger customer base, and are also more easily replaced, because their products do not require customization.
Great posts, as always, and even more needed this time because of the spotty and weak nature of the information in the mainstream press regarding the Chrysler bankruptcy.
It seems to me that your three posts to date, though all very clear and informative, are moving increasingly from reporting towards advocacy, siding with the position apparently advocated by the non-TARP lenders (namely, that a quick asset sale followed by a cram-down plan that leaves them with the payout targeted by the Administration is a "sub-rosa" Plan and will violate the "absolute priority" rule), without focusing equally on the rationale of the position apparently advocated by the Administration, union and major vendors -- namely, that a quick asset sale to FIAT, followed by a Plan taking equity that would ordinarily go to lenders and using it to fund the lion's share of a retiree health care obligation will still likely provide the lenders with more than they would receive in a liquidation scenario, thereby justifying a limited departure from the "absolute priority" rule and distinguishing the situation faced by Chrysler from the facts in the reported "sub rosa" plan cases).
At the risk of playing mind-reader (and please correct me if I am wrong), I can think of two different reasons that a thinker such as yourself might be wary of the Administration's position, both of which raise some questions in my view.
First, a lawyer passionately concerned about bankruptcy policy and setting bad precedent could wonder whether it ever makes sense for bankruptcy judges to have the power to dispense with voting and Plan disclosure requirements in favor of an asset sale that may dictate major provisions of a Plan of reorganization which risks a judicial departure from the absolute priority rule (in the event of a cram-down of good faith lenders) -- all based on a quickly-formed judgment that the lenders are likely to fare less well in a liquidation, and/or that exceptional circumstances warrant risking such a departure. Even if this may work with a really good judge making the judgment call and a really good manager running the transferred operations, what will happen with a poor judge and manager in an unexceptional situation?
While I share this concern, I think that the situation may call for some outside the box thinking, and that a good judge could help limit the potential for bad precedent by a well-written decision clearly acknowledging the continued vitality of voting and disclosure requirements, as well as the "absolute priority" rule, but spelling out the exceptional circumstances for a possible, limited departure from either or both. Such a decision might point out that the U.S. government here has made and is making a historically unprecedented commitment of public monies to the reorganization effort of a private enterprise (much of it unlikely to be repaid), because it views the reorganization as important to the chance for survival and success of an important industry, which has a further, unquantifiable value to the Government's overall economic recovery effort.
Second, any concerned citizen may wonder whether it makes sense for the Administration to commit so much public money to the reorgan1zation effort of a private company that has lost tens of billions of dollars in the last ten years or so, and to exercise such a high level of management or control over the terms for a business reorganization, particularly where the proposed Plan calls for providing a controlling interest in the company to one constituent, organized labor, whose understandable resistance to concessions in the past has been viewed by many as contributing to the company's competitive disadvantage.
These concerns, of course, are part of more fundamental political debates about the role of government in an economic crisis, and the potential for disproportionate influence by any organized group. They are important to understanding the historical context of Chrysler case, and I would hope that they inform the decision-making process as well. All constituencies should be incentivized to take such steps as may be required in the future to maximize the chances for a successful company going forward.
[Ed. Note: Thanks for your extensive comment, Bob. I surely wouldn't mind having the opportunity to be an advocate in this matter, but I'm not advocating now, simply presenting another side that, for all the words generated, has substantive merit but has been virtually ignored. The arguments speak for themselves. In the end, I think the Second Circuit in Motorola provides the direction on both the sub rosa and absolute priority issues, which really are flip sides of the same coin. Still, I can't imagine this (or any) judge letting the case close in a manner resembling the ending in Act V, Scene ii of Hamlet. Of course, you never know what the Second Circuit may do two years down the road (if it gets that far), particularly since--as the deal presently stands--these eggs have the ability to be more easily unscrambled than is the normally the case in the 363 context.]
The non-TARP lenders have an important legal point; however in this credit environment it would be difficult to effect a reorganization that would leave them with any more than they are getting from Treasury. The real stumper here is why the DIP lenders---you and I---are handing over a large equity interest in NewCarCo to the UAW. In a liquidation they would get nothing. In terms of the NewCarCo, they bring little of value to the table. They can certainly encourage their members to not take jobs at NewCarCo, but given the manufacturing situation here in Michigan the argument is unlikely to be very persuasive. In any case, Chrysler is idling production due to an inventory glut and it will be some time before they need to ramp up production. Plenty of time to hire new workers (that is the same workers without the UAW contract). If the Treasury were a private agent, the principals would be up in arms.