Chrysler Bankruptcy filing ON:
As today's WSJ article points out, several of the hedge funds who refused the voluntary debt swap did so because they stand to profit ONLY IF Chrysler is forced into bankruptcy.
Some have bought credit default swaps on Chrysler debt that will PAY OUT when triggered by a bankruptcy filing....
Others have much bigger investments in GM and Ford and would see the values of those investments soar if Chrysler were liquidated and sold for scrap --- because that would take all of Chrysler's production off the market, reducing over-supply and benefiting Ford and GM.
Fiat also stands to benefit because only in a bankruptcy court can dealer agreements be broken, and legacy environmental problems jetisoned:
* APRIL 30, 2009, 9:29 A.M. ET
Funds Won't Impede Chrysler Reorganization
By NEIL KING JR. and JEFFREY MCCRACKEN
online.wsj.com
WASHINGTON – The restructuring of Chrysler LLC will go forward even though a handful of hedge funds have refused to accept the Treasury Department's offer to cut the auto maker's debt, an administration official said on Thursday.
"Their failure to act in either their own economic interest or the national interest does not diminish the accomplishments" by Chrysler, its planned alliance partner Fiat SpA and other stakeholders in the company, the official said, "nor will it impede the new opportunity Chrysler now has to restructure and emerge stronger going forward."
The administration's auto task force tried to get all 46 of Chrysler's secured lenders to agree to a debt-reduction deal until talks broke down late Wednesday. President Barack Obama is expected to address the issue at a news conference later Thursday, and could announce that Chrysler is now going to seek reorganization in bankruptcy court. Administration officials said Thursday morning that Chrysler will file for bankruptcy as talks with creditors fail, according to the Associated Press.
"After a month of tireless negotiations, the administration went into yesterday afternoon with the full support of Chrysler's key stakeholders, including the UAW and the largest creditors," the administration official said. "That support remains."
Some of the largest banks agreed to take $2 billion in cash in exchange for giving up $6.9 billion in secured debt. On Wednesday that auto task force increased the offer to $2.25 billion, but a few of the creditors rejected that.
"While the administration was willing to give the holdout creditors a final opportunity to do the right thing, the agreement of all other key stakeholders ensured that no hedge fund could have a veto over Chrysler's future success," the official said.
Administration officials, who have been braced for a Chrysler bankruptcy filing for weeks, say all the pieces are in place to get the company through the court quickly, perhaps in a matter of weeks.
On Wednesday, J.P. Morgan Chase & Co., which leads the creditor group as Chrysler's largest lender, gave the other 45 banks and hedge funds 90 minutes to vote on the deal. A large number of the funds voted no and refused to budge, paving the way for an all but unavoidable trip to bankruptcy court, said people close to the talks.
Chrysler's likely trip to bankruptcy court is a watershed moment for the car maker that popularized the minivan, is the home of the Jeep and managed to rebound from an earlier financial crisis in the late 1970s. But Chrysler's fortunes have faded since its breakup with Daimler AG two years ago.
A trip through the courts will open a new chapter of uncertainty as the company's lenders and its thousands of affiliated dealers could mount a series of legal challenges to the administration's efforts to pull off a swift reorganization.
If the Obama administration's calculations are correct, the process should pave the way for Italian auto maker Fiat to take over the American company.
Bank holdouts may get blamed for pushing Chrysler into court. But there are other reasons behind the move.
One reason Chrysler needs to file for bankruptcy protection is so that Fiat can clear out hundreds of auto dealers from its sales network, which is easier to do in bankruptcy, where dealer franchisee agreements can quickly be rejected or amended. The auto maker also has asbestos and environmental liabilities that Fiat doesn't want and are more easily shed in bankruptcy court.
The administration worked to the wire to seal a deal outside of court that would put Chrysler in an alliance with Fiat and forge an arrangement between the car company and the United Auto Workers union. Chrysler's UAW membership passed a related negotiated deal with the car company late Wednesday. Fiat is expected to signal its approval for an alliance with Chrysler on Thursday.
Administration officials said they remained confident Chrysler could shed much of its debt and come out of a court-supervised restructuring as a stronger company. They ruled out the possibility that Chrysler could end up being liquidated and sold off in pieces.
Despite shrinking radically in recent years, Chrysler still employs about 54,000 people in the country with assembly and parts plants all over Michigan, Ohio and Indiana.
President Barack Obama said Wednesday that he is "very hopeful" of a resolution that maintains Chrysler as a viable company. "I think some tough choices are being made" by Chrysler's lenders and workers, Mr. Obama said in response to questions at a prime-time news conference.
If Chrysler were to file, "it would be a very quick type of bankruptcy," Mr. Obama added.
Treasury officials remain concerned that a Chapter 11 filing could lead to a loss of control of the car maker's future. Some Chrysler creditors could argue in court that the company is worth more to them in liquidation than they are granted in the Treasury's deal, which offers the creditors about 29 cents on the dollar in cash. Some of the creditors have signaled they are prepared to fight the matter in court.
The administration last month gave Chrysler until May 1 to seal an alliance with Fiat, negotiate a new cost-cutting arrangement with the UAW and pare its debt. Assuming a brisk passage through court, the administration has worked out a deal that will grant the UAW's retiree-health-care fund a 55% stake in the car company, while Fiat will eventually gain a 35% stake. The rest will be in the hands of the federal government. Chrysler has about 115,000 retirees.
As part of the UAW deal, the union agreed to eliminate a number of benefits.
Bank-debt holders, many of them hedge funds or distressed debt funds, voted against the latest deal for various reasons, ranging from financial interests to philosophical ones. Some said their funds had bigger positions in Ford Motor Co. or General Motors Corp. and could benefit by a Chrysler bankruptcy and the production capacity that may eliminate. Some funds may also have credit-default swaps on Chrysler bank debt that pay out in the event of a bankruptcy.
Three of the bank-debt holders on the bank-steering committee, Oppenheimer Funds, Perella Weinberg Partners' Xerion Capital Fund and Stairway Cap Management, told J.P. Morgan and the other large lenders on a bank call Tuesday that they wouldn't support the deal and would advise other lenders not to support it. It is unclear whether the later counteroffer changed their position.
Write to Neil King Jr. at neil.king@wsj.com and Jeffrey McCracken at jeff.mccracken@wsj.com |
