Wednesday, April 22, 2009


According to the AP and other news sources, Chrysler's senior lenders have rejected the Obama Administration's directive to reduce their $6.9 billion of debt to $1 billion. They have also rejected the Bush Administration's less stringent requirement to write down 67% of their debt. The lenders have done this with good reason!

No one can ask the senior lenders of Chrysler to get the same treatment as the bondholders of GM for two important reasons. First, the bondholders have no collateral securing their loans. This means that in a liquidation, the bondholders and all other unsecured creditors (these are other lenders, employees, retirees, vendors and suppliers with no collateral) all share in the proceeds of free assets (those assets not used as collateral for other loans such as mortgages on facilities).

The loans of the senior lenders of Chrysler are secured by various assets of Chrysler. This means that before any other creditors get paid in a bankruptcy, the senior lenders get paid from the proceeds of their collateral in a liquidation or get cash or debt for the value of their collateral if the company reorganizes and emerges from bankruptcy. Further, if the senior lenders are not paid in full from their collateral in either cash or new debt, they get to share prorata with the unsecured creditors in the pool of assets that are left over.

So, there is no basis whatsoever to treat the secured senior lenders of Chrysler like they are unsecured bondholders. I am a little surprised that the Auto Task Force has taken this approach since they seem pretty on target on most of their other points. I must be missing something which hopefully will come to light soon.

Second, the way it should work is that a viable business plan for Chrysler should be agreed upon. This will demonstrate the amount of senior debt that can be serviced. Then the value of the senior lenders collateral needs to be determined. The senior debt should then be set at the lesser of the value of the collateral and the amount of senior debt that can be serviced.

I suspect that the collateral is worth more than the debt that can serviced. This means that excess of the value of the collateral over the debt that can be serviced needs to be satisfied with equity. I have worked extensively with Chrysler's senior lenders over the years on other matters. They will approach the situation as I have laid out. It is the basis for whatever counter-proposal they give the Treasury. I am also sure the Auto Task Force knows that also.

Cheers, Mike

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