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More on the Auto Bailouts

By Adam Levitin

pThe term sheets are up a href=http://www.treas.gov/press/releases/reports/chrysler%20final%20term%20amp;%20appendix.pdfhere/a and a href=http://www.treas.gov/press/releases/reports/gm%20final%20term%20amp;%20appendix.pdfhere/a. Two initial observations:/pbr /div(1) These are supposed to be secured loans, but they are almost assuredly junior liens--Chrysler already has a second lien facility, so that would make Treasury third. #0160;These liens might be underwater from the start, and a lot of the collateral probably isn#39;t very valuable to anyone but GM or Chrysler. #0160;These companies are a lot like railroads in that a lot of their value is as going-concerns. #0160;Piecemeal, there isn#39;t much there. #0160;This means that the primary value of being a secured creditor is having hostage value--the liquidation value isn#39;t going to be very much. #0160;But if either GM or Chrysler can#39;t meet the restructuring terms, they will be going into the Chapter to liquidate (whether they say so or not). #0160;And if that#39;s the case, then it doesn#39;t do the government much good to be secured. #0160;/divbr /div(2) The government has tried to protect itself by providing that if there#39;s a bankruptcy, the loan will rollover into a DIP facility at the government#39;s exclusive option. #0160;I don#39;t think that works. #0160;First, this is likely an executory contract, so it is automatically rejected under 11 USC 365(c)(2). #0160;Second, even if it isn#39;t an executory contract, there will still have to be a 364 hearing. #0160;I can#39;t see the government getting into a priming fight (or winning--there#39;s no ability to offer the senior lienholders adequate protection). #0160;And because everything is encumbered, the government will have to settle for junior liens, which puts it right back where it was--an underwater junior. #0160;Moreover, if the government wants to do this as a rollup refi of the prepetition loan or a cross-collateralization, I#39;d wager that it will find itself in some pretty sharp litigation. #0160;There#39;s no circuit level ruling (as far as I#39;m aware) that signs off on a rollup refinancing, and cross-collateralization is viewed very skeptically. #0160;There#39;s huge hostage value to any creditor that can make a credible threat of pursuing such litigation. #0160;In any case, if GM or Chrysler goes into the Chapter as a freefall, the government would probably do well to wash its hands of the matter. #0160;/div

Full post as published by Credit Slips on December 20, 2008 (boomark / email).