Marketplace Scratch Pad

Pass the torque wrench, Steve

Paddy Hirsch May 4, 2009

So, Chrysler expects to emerge from bankruptcy protection in July. This according to the company’s bankruptcy filing. Nine weeks. Forgive me if I sound skeptical. The Obama administration doesn’t appear to have convinced the requisite number (or representative dollar amount) of top lenders to Chrysler that it needs to get the proposal through the court, or even to trigger a cramdown. In fact, the holdouts filed an objection to the plan to sell assets worth $2 billion to Fiat.

Looks like Steve Ratner and the rest of his auto task force have got some tuning up to do.

Dealbook says even if all goes well, this isn’t going to be an inexpensive trip to the shop. For a start there’s the loan that Chrysler’s going to need to get it through the bankruptcy period. It’s called a debtor-in-possession facility, or DIP, and Robert Manzo of the Capstone Advisory Group estimates that Chrysler will require $4.1 billion in financing.

At Monday’s hearing, Mr. Manzo said the government’s bankruptcy financing for Chrylser had a low likelihood of being repaid. The loan was described as a “junior” debtor-in-possession loan, meaning that it would be repaid only after $6.9 billion in debt held by banks and hedge funds … Mr. Manzo testified that Chrysler had sought alternative financing from other banks, such as JPMorgan Chase, only to be turned down at every turn.

The Treasury has allocated $4.6 billion to Chrysler’s reorganization, which means if the government and this bankruptcy runs more than a week and a half, that budget will balloon. But for all my skepticism about the government’s ability to get this thing done in nine weeks, I have to admit Obama is putting on an awesome show. I’m reminded of that scene in Terminator 2 when Arnold arrives in the nick of time to rescue the future savior of the human race. I’m not suprised Perella Weinberg might have been a tad intimidated.

Felix Salmon says the other holdout lenders (he calls them vulture investors, which gives you an idea of here he stands on this issue) should throw in their hands, too. He notes holders of fully 90 percent of Chrysler’s bonds are now on board with the government’s deal, and says the holdouts should man up and move on.

Other commentators, including Joe Wiesenthal at Clusterstock, argue the UAW’s being given preferential treatment.

if we’re thinking about the future, we’d much rather ensure that the notion of bondholder seniority and the rule of law is preserved rather than ensuring that institutions of industrial workers known as unions are preserved.

The New York Times’s Floyd Norris writes in his High & Low Finance column that this is not a normal bankruptcy. As if we hadn’t worked that out yet. He says the government is acting as a philanthropist, coming to the aid of a dying corporation.

If Chrysler were going into bankruptcy with available exit financing, the bondholders would have every right to fight for their share of the pie, and to argue that other creditors were getting an unfair share, he says. It has no such financing available, other than from a government with no legal obligation to provide it.

In other words, as Dealbook puts it, the holdouts have a choice: let administration take control, under its terms, or let the company collapse. Chrysler won’t be able to get any money elsewhere – it’s tried that and failed – and if it collapses, the holdouts will get far less that they will under the Obama offer. What is the bid for an auto assembly plant in Detroit, with machines built to produce cars that will not be produced anymore?

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