Wednesday, April 29, 2009


As Chrysler's reorganization negotiations speed toward tomorrow's deadline for a deal, certain parties in its bank group are holding out. The four agent lenders have agreed to terms based on their negotiations with Chrysler. However, there are 40 other banks, hedge funds and other debt holders that must agree to the terms or Chrysler will be forced to pay them off in full or, file for bankruptcy to force the holdouts to comply with the agreement.

Remember these banks are secured lenders. They have collateral and therefore rank ahead of all pre-filing creditors in a bankruptcy to the extent of the value of their collateral. There first may be a court hearing to value to banks collateral. This is always a sticky issue and very subjective. The banks have $6.9 billion of loans to Chrysler. Let's say simply that the court determines that the banks' collateral is worth $2 billion. This means that the banks' secured claim would be $2 billion and the banks would have an unsecured claim of $4.9 billion.

The banks' secured claim of $2 billion would have to be satisfied with cash or debt satisfactory to the banks as a class. This means that unlike an out-of-court restructuring which requires a 100% of the banks to agree, in a bankruptcy only a simple majority of the number of lenders holding at least two-thirds of the amount of the loans are required to approve the treatment.

Currently the NY Times reports the four bank agents alone hold over two-thirds of the amount, so it is a matter of getting a majority of the number. Some smaller debt holders may believe that the value of the banks' collateral is more than $2 billion and will therefore not vote for a lesser treatment. Or they may be playing the "hold-up value card." They are hoping that their claim can get better treatment because the amount is small and the cost of a bankruptcy is large. They may quietly get away with it. At least that is what they hope.

Even as you read, there is a lot of arm twisting going on and Ron Bloom, head of the Auto Task Force is invoking the name of President Obama more than once. Stay tuned.

Cheers, Mike

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