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Auto Bailout

posted by Adam Levitin

TARP funds are now going to be used to bail out the auto industry.  Whether or not this is ultimately a good or responsible idea is something that I will reserve comment on for now.  The loans' term sheet isn't out yet, but it's outlines are being reported:  $13.5bn now, callable on March 30 (conveniently on the Obama administration's watch) if the automakers haven't reduced their debt by 2/3s (including via deb/equity swap--shareholders will get diluted) and worked out a competitive labor deal.

The idea animating these bridge loans is that the exploding deadline will force the automakers and their major creditor constituencies--labor, secured creditors, suppliers, dealers, and bondholders--to work out a restructuring.  That's a nifty move, but it is a gamble, and as I explain below, it is a very risky one for taxpayers. The Times reports that the loan will have priority over other creditors, which should protect taxpayers/  Only problem is that I don't know how that would be possible under existing law.     
There isn't any mechanism in existing law for giving new money priority over old money outside of bankruptcy, other than secured credit, and I don't think there are any significant unencumbered assets at GM or Chrysler.  Therefore, even if these are "secured" loans, there really can't be priority from security unless existing secured creditors can be convinced to give up their liens (and what fool would do that?).  

If the loans aren't secured, there isn't any way to give them priority under existing law, and this deal doesn't change the law.  Absent a subordination agreement (and there isn't one here), if the government lends unsecured, it is on equal priority with all other unsecured creditors outside of bankruptcy, and equal priority with all general unsecured creditors in bankruptcy.  Note that this is very different from the bank bailout deals where the government took preferred stock.  Companies can issue preferred that has a priority senior to common.  But there's no ability to do this with debt.  At best, GM or Chrysler could issue senior notes (and that depends on the notes they have already issued), but these would only have priority over other bondholders, not over other general unsecured creditors.  If you want to give priority to new money, the only way to do it currently is in bankruptcy.

Now if the government is unsecured, it means that this deal is really dangerous for taxpayers.  If the government calls the loans, it will precipitate a bankruptcy.  If the government hasn't been repaid, the government will just be another old unsecured creditor, and will have the awkward position of having to vote on a reorg plan.  If the government is repaid within 90 days of the bankruptcy filing, then the government will be holding a preferential payment that can be clawed back, leaving the government just another old unsecured creditor.  In an automaker bankruptcy, the unsecureds will get cents on the dollar. That's a pretty bad deal for taxpayers. Let's hope that no one calls the government's threat and that these loans don't have to be called.   

(OK, maybe the government does something cute and does this as a swap or repo so it isn't covered by the automatic stay.  But come on...  ) 

Comments

Ironically the condition of calling the loans -- that the co is not 'viable' in March -- is that the company can't pay back the loan. At taht point the loan is already underwater and probably as you point out completely underwater if the loan is unsecured which it will probably have to be as I imagine these companies are totally liened up. So there really won't be any point in calling it, and so the whole 'calling' thing is a farce.

What happened to the whole idea of having the govt provide a dip loan? The priming lien would have protected taxpayers. This is not a loan, it's actually not even a bailout, it's just a gift, we will NEVER see this money again ever. The fact is that Bush doesn't want the last thing on his watch to be the bankruptcy of the american auto industry, so he is passing the buck to Obama. Also, if using tarp funds, this thing is totally illegal.

Term sheets are released:

http://www.treas.gov/press/releases/hp1333.htm

It says

"Upon the filing of a voluntary or involuntary bankruptcy petition by or in respect of any Loan Party, Lender shall have the exclusive right, exercisable at its option, to convert this Facility into a debtor-in-possession facility in form and substance acceptable to Lender."

I guess that's how they achieved claim priority. Legal?

12-21-08

The Automaker's should scratch with their own nail,they got into this
mess,they should be able to come up, and solve their own mistakes like
overproducing cars, more than the demand,letting abusive unions inti
midated them and force them to pay higher wages,than foreing auto-makers
,the goverment just gave them a blank check to do againg what ever they
want with no responsability, or enforced action to make them comply with
what the goverments wants from them be responsible and to modify
their carlines, for eficient and competitive vehicles,on march 31,09
they'll be back to capitol hill crying for more bailout money with no
realistic commitment,let them go to bankrupcy and restructure their
debt,not againg money from the taxpayer's please, if one co. desapears
America will still be here,maybe the time to consolidate is here car-
maker's are taking at this point the Gov. for a Ride

Every tax payer should be out raged that these companies are being bailed out. Unions have ruined this country. Any doubts watch this video.

http://www.clickondetroit.com/video/10235271/index.html

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