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The · Psychohistorian


Anatomy of a restructuring

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With Chrysler finally in bankruptcy, the spotlight in the auto industry shifts to GM. And with the government using the Chrysler creditors as a scapegoat, the spotlight is now squarely on the GM creditors.

Evidently the GM creditors realize this. The GM creditors' committee recently provided a counteroffer to the government's restructuring plan. I thought it would be interesting to see how the two plans stack up, so here they are in a nutshell. The numbers are from news articles, not from filings, so they are approximate:

Government plan:
1% of equity is retained by the current shareholders
39% of equity to the UAW union in lieu of $10 Billion owed the health care plan
10% of equity to bondholders in exchange for $24 Billion debt forgiveness
50% of equity to the government in exchange for about $10 Billion debt forgiveness

Creditors' plan:
1% of equity is retained by the current shareholders
41% of equity to the UAW union in lieu of $10 Billion owed the health care plan
51% of equity to bondholders in exchange for $27 Billion debt forgiveness
government doesn't have to forgive any debt

If the government is really just looking for a fair deal for everyone and don't want to be in the business of owning companies, as Obama claims, then they really have no excuse for rejecting the creditors' plan: it's just as fair to the union, and the government doesn't need to forgive any debt. The difference between $37 Billion and $44 Billion in total debt forgiveness is not going to make or break the deal, given that GM's total debt is around $180 Billion.

On the other hand, if the government really sees this as more of a political football than an investment, the administration may feel it is worth losing a few billion taxpayer dollars to avoid potential accusations of "caving in to bondholders". In this case, we can expect the government to ignore the bondholders.

It will be interesting to see how the government responds to the bondholders' plan.

Article on the GM bondholder counterproposal:
http://online.wsj.com/article/SB124105121817871157.html

Articles on the government pressuring secured Chrysler creditors to accept a worse deal than unsecured creditors:
http://www.nytimes.com/2009/05/01/business/01hedge.html
http://voices.washingtonpost.com/economy-watch/2009/04/holdouts_on_chrysler_deal_say.html?hpid=topnews
http://seekingalpha.com/article/134773-fascinating-showdown-ahead-for-u-s-chrysler-and-fiat
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On May 4th, 2009 11:10 am (UTC), greyautumnrain commented:
I find the telling thing about this is that in the government plan, the bond holders get 0.42% of equity per billion $ of debt relief, but the government gets 5% equity per billion $ of debt relief. Doesn't sound very fair to me.
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On May 6th, 2009 04:52 pm (UTC), psychohist commented:
... and speaking of the Chrysler bankruptcy
The most recent news on the Chrysler bankruptcy is that the government is going to forgive Chrysler's debt to the government in exchange for post-bankruptcy equity. Of course they have to forgive the $4 Billion loaned last year that was supposed to keep Chrysler out of bankruptcy; that money predictably failed to achieve its purpose, and ends up like other unsecured prebankruptcy debt. (The government may be pressuring for a sweetheart deal on their equity share there at the cost of the secured debt holders, but that's another story.)

However, the government is also going to forgive $3 Billion of debtor in possession financing that Chrysler hasn't even used yet. Normally, debtor in possession financing is the most senior debt, since it happens after the bankruptcy, and it's expected to be paid off by the reorganized company. Why even call it "financing" when you're going to forgive it immediately? Just call it what it is: a government grant.

Of course there's also the $6 Billion in loans after reorganization that won't be forgiven until later. That's being provided by the government so that Fiat won't have to pay any cash for their 20% stake in the reorganized company. 'Cause you know, the expert management that got Fiat into its current shaky state can pull Chrysler out of its hole, no problem!
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