PrintMay 24, 2009
Fiat Frets about Chrysler
What happens when the government intervenes in the delicate (and harsh) bankruptcy process?
We are beginning to find out. The federal government’s “structured” bailout of Chrysler has prevented the market from performing the job that only the market can perform: determine the actual value of the assets of the company.
Professor Mark Roe writing in Forbes had this to say on May 13:
The trouble is that with the bankruptcy set-up approved this week, no one can tell. There's no real market check on the Treasury plan, just a pseudo-market test that won't fool any market player. This pseudo-test, approved by the court last week, led Chrysler’s dissenting creditors to give up.
In the test approved, outsiders can bid the deal away from Fiat and the U.S., but bidders can bid on only one deal -- the same UAW deal that the government negotiated before the bankruptcy. The court agreed to Chrysler's and the Treasury's proposal that no one be allowed to bid on the assets alone. But that's what Buffett and the capital markets grumblers are complaining about: the government, and now the bankruptcy judge, is ignoring creditors' contracts priority access to a first cut at Chrysler's assets. The deal on the table gives them no access to those assets.
In the test approved, outsiders can bid the deal away from Fiat and the U.S., but bidders can bid on only one deal -- the same UAW deal that the government negotiated before the bankruptcy. The court agreed to Chrysler's and the Treasury's proposal that no one be allowed to bid on the assets alone. But that's what Buffett and the capital markets grumblers are complaining about: the government, and now the bankruptcy judge, is ignoring creditors' contracts priority access to a first cut at Chrysler's assets. The deal on the table gives them no access to those assets.
Less than two weeks later, even Fiat is expressing concern about the fixed rules of the bailout. According to Reuters:
Chrysler has a government deadline of June 15 to close the transaction to sell itself to a "New Chrysler" owned by the U.S. and Canadian governments, Chrysler's union and Fiat, according to court papers. Chrysler's unsecured creditors' committee said in court papers on Friday that if the sale was not able to go forward it would mean certain liquidation for the iconic U.S. automaker.The last sentence says (and does not say) it all. There is only one liquidation scenario – the scenario approved by the Obama administration and the UAW.
Fiat, however, said that any delay to the sale process "could ultimately prove fatal" to Fiat's plan to revive Chrysler. It said it already has concerns about the value of the assets "New Chrysler" is expected to acquire from "Old Chrysler" as the company's plant shutdown is affecting its suppliers and dealer networks.
Chrysler's financial advisory firm said in separate bankruptcy court documents on Thursday that, based on updated financial information, the financial recovery for lenders and the U.S. government would be worse under a liquidation scenario than it previously thought.
The current state imposed conditions offer no flexibility for negotiating crucial contested areas in the restructuring of Chrysler. Given a scenario set in cement, it is little wonder that all private investors are nervous about the restructuring of Chrysler. Unlike the government, private investors have real money to lose.
