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Obama: Chrysler reorg won’t take long

Paddy Hirsch Apr 30, 2009

The president will make an announcement about the auto sector, and Chrysler in particular, at noon. A Bloomberg report quoted an unnamed official citing the failure of some small creditors to agree to a final settlement. So it looks as though Chrysler will file for bankruptcy under Chapter 11 of the code after all. The Obama Administration has done everything it can to avoid this, and yet Obama said yesterday that the process won’t be so painful after all.

“It would be a very quick type of bankruptcy, and they could continue operating and emerge on the other side in a much stronger position,” Obama said. The goal is to finish the bankruptcy in 30 to 60 days, people familiar with the plan said.

So let me get this straight. After months and months of tortuous scrapping, it turns out that Obama now thinks bankruptcy would be the quickest, cleanest solution for Chrysler after all? You mean, bankruptcy doesn’t mean death, but can lead to the creation of a more streamlined, efficient entity?

Well, OK, I respect a man who can change his mind. But what about this idea that the Chrysler will emerge, phoenix-like from the ashes of Chapter 11 after just a few months?

I reported on bankruptcies and distressed companies for several years before I came to Marketplace, and the administration’s sunny optimism sounds chemically-induced to me. But don’t take my word for it. Terri Rasmussen’s a bankruptcy lawyer (and it’s all about the lawyers when you’re in Chapter) at Plunkett Cooney.

The average Chapter 11 case, even a relatively small one, is rarely likely to be completed in less than a year and it can often take two or three years, or even longer, for a company to emerge from Chapter 11.

The president is talking about Chrysler filing what’s called a pre-negotiated (Dealbook calls this a pre-arranged) bankruptcy. Teri spells it out:

In a prenegotiated bankruptcy, actual votes or agreements to vote have not yet been reached with the critical mass of creditors, although resolution has typically been reached with those creditors deemed most crucial to success.

The holdouts in this negotiation are hedge funds and other investors who bought senior secured debt, and who reckon it’s worth more than the 33 cents on the dollar that the government’s plan offers. To overrule these holdouts, the government needs to win over 50 percent of the holders of that class of debt, and two-thirds of the dollar amount.

Right now, it doesn’t look as though it’s got enough, which means no pre-negotiated filing, and certainly not the much vaunted pre-packed bankruptcy (or pre-pack, if you want to sound like an insider).

a prepackaged bankruptcy differs from a prenegotiated bankruptcy in that votes for a plan of reorganization have already been solicited and agreed upon prior to the filing, thereby leaving nothing to chance when it comes to achieving a successful confirmation of the Plan of Reorganization.

If all goes well, in a pre-pack (and maybe in a prenegotiated filing), the company can dip in and out of bankruptcy in less than six months. But here’s the kicker:

The most important characteristic of a prepack (or a prenegotiated bankruptcy) is that the major players in the bankruptcy have come to an agreement among themselves about the most important issues of subsequent financing, lien priority, and the extent to which the debt owing will be discounted or terms of repayment extended.

In other words, everyone agrees who gets what and when. And that’s BEFORE the case comes before a judge. But we’ve already seen that the various parties in the Chrysler case do not agree. Why is that small group of creditors holding out? Right now, Bloomberg says, they don’t want Chrysler putting its best assets into a new entity. It sounds to me as though they think they’ll get a better deal if it’s left to a judge to decide what their holdings are worth, and how the company’s assets should be distributed.

Prepackaged bankruptcies tend to work best where there are a limited number of sophisticated secured creditors involved with whom productive negotiations can actually be had. They tend to work less well when a debtor has a large number of creditors, especially if unsecured, with a variety of different claims ( e.g. trade creditors, employees, landlords, equipment lessors, etc.)

Chrysler is about as messy as it gets when it comes to a bankruptcy negotiation. You’ve got dealers, creditors of all stripes, asbestors claimants, unions, the taxpayer…the list goes on. The government’s done a grand job of getting most of the parties on board, but these holdouts at the top of the capital structure are a tough nut. If the auto task force can’t get them on board, Chrysler could spend a long time (and a lot of money) in bankruptcy court.

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