Sometimes, the Fly in the Ointment Has a Right To Be There

Wed, 03 Jun 2009 12:30:55 +0000

Picking up on an earlier post, it appears that the holders of Chrysler's secured debt will have their day in court -- appeals court to expedite the process. From the Wall Street Journal today:

The Second U.S. Circuit Court of Appeals in New York said it would hear an appeal by a group of Indiana pension funds challenging the sale of most of Chrysler's assets to the company's proposed partner, Fiat SpA of Italy. Oral arguments in the appeal will begin Friday, according to the court's order. Chrysler had hoped to potentially exit bankruptcy as soon as this week.

The article goes on to point out the main issue:

Senior lenders owed $6.9 billion would receive $2 billion, giving them a recovery of about 29 cents on the dollar.

The Indiana funds say that, under Chrysler's plan, creditors with less seniority, namely the UAW, would see a better recovery. The UAW's health-care trust has an unsecured claim against Chrysler for about $10.5 billion. In addition to the equity stake in Chrysler that the trust would receive, it would also get a $4.5 billion note.

An article in The Washington Post today describes the complaint as follows:

The funds, which hold about $42 million of Chrysler's $6.9 billion in secured debt, claim the terms of the sale violate their rights as secured lenders by limiting their ability to recover all of their original investment in the company.

If the debt is senior, it should be paid in its entirety before those with junior debt are paid at all. If the debt is secured, then no transaction should take place that reduces the security of the debtholders' claim. No court should be violating these basic principles, no matter how much pressure there is from the other two branches of government.

A question: This $6.9 billion in debt is referred to alternatively as senior or secured. If anyone knows which one it is (or perhaps why it doesn't seem to matter in the way this debt is described), please chime in below.