Steve Jakubowski is at it again (see Chrysler Bankruptcy: Anything but Surgical for background). In Steve’s latest post (Will the Absolute Priority Rule Kill the Sale?) he gets right to the heart of the matter:
When does the “absolute priority rule”…which establishes a hierarchy of recovery rights among creditor classes take a back seat to the “fresh start” rehabilitative policy of chapter 11?
Chrysler is arguing that it should be permitted to move forward with the Fiat deal as a means of getting a “fresh start” of the kind that bankruptcy law was designed to allow. The dissenting lenders, by contrast, are arguing that they deserve priority as first lien holders, that their claims should take precedence above all others, and that they should be allowed to liquidate Chrysler if they feel that is in the best interest of the first lien holders.
Chrysler’s argument is essentially that it’s a “dead man walking”… [and] that if the “sale” doesn’t close on the accelerated timetable proposed, it will wither on the vine, resulting in “a rapid and severe loss of value.” …the transaction should be approved because, first, Old Chrysler is receiving “fair consideration” in the transaction and, second, Chrysler’s going concern value will be preserved, jobs will be retained, and an extensive network of independent dealers and suppliers will live to see another day.
Is that enough to approve the Fiat deal over the objections of the dissident lenders? According to Steve:
Surprisingly, though, Chrysler’s opening memorandum doesn’t squarely address the issue laid bare in my previous post and in the preliminary objection of the dissident lenders; that is, why isn’t the proposed transaction a sub rosa plan of the kind prohibited under the law of the Second Circuit?…Chrysler’s opening memorandum of law…[also] does not address the important question of why, absent the consent of the dissident lenders, 65% of the equity in New Chrysler should go to junior creditors in satisfaction of their respective claims against Old Chrysler while the claims of senior dissenting lenders go unpaid?
By sub rosa, Steve is referring to a Latin term meaning secret or covert. In essence, the dissident lenders are arguing that the government, in conjunction with Fiat and the rest of Chrysler’s creditors, are trying to run an end around, making a deal that neither respects their rights nor makes them whole. Moreover, the dissident lenders feel that the deal has been crammed down their throats in a less than transparent way.
In my opinion, the dissident lenders have a valid complaint. Unfortunately, they are swimming upstream. They are not only in the minority among Chrysler’s creditors in opposing the Fiat deal, but in the minority among their own class of creditors (the total group of first lien holders including the likes of Citigroup and JP Morgan).
Given the incentives of the various interested parties (e.g., the auto union, the US government, Chrysler’s suppliers, Chrysler’s dealers) and their status as junior creditors, it is no surprise that junior creditors would support the Fiat deal. But why, you might ask, would various of the first lien holders agree to a substantial haircut when it is possible that they might be better off liquidating Chrysler? Because the majority of the debt held by first lien holders resides with banks that accepted TARP money. And the federal government can exert a tremendous amount of influence over these creditors. This is the krux of the objection of the dissident lenders.
As explained by the Associated Press (see Chrysler Files for Bankruptcy):
…a group of funds identifying themselves as 20 of Chrysler’s “non-TARP lenders” released a statement saying they had been sidelined during negotiations between lenders and the government. The group, which said it holds $1 billion in Chrysler debt, complained that the four banks were “obviously conflicted” because they had accepted money from the government’s Troubled Asset Relief Program while they had not gotten TARP money.
Fascinating stuff. And kudos to Steve on a wonderful legal analysis of this complex problem! Please do visit his post Will the Absolute Priority Rule Kill the Sale? to read the full story.