« Chrysler Appeal -- Stay Edition | Main | GM, Chrysler, and Future Tort Claims »

That Wasn't So Smart

posted by Stephen Lubben

Fiat's CEO flushes his company's leverage, saying Fiat won't walk away from the deal even if it goes past June 15, potentially complicating things for Chrysler's attorneys, who have argued that any delay will "kill the sale."  The Obama Administration can't be too pleased either, since they may be forced to play the heavy, again.


TrackBack URL for this entry:

Listed below are links to weblogs that reference That Wasn't So Smart:



I disagree.

As long as Fiat's position was ambiguous, the first-lien lenders potentially had leverage to negotiate a change in the terms offered by Chrysler.

The stay worked to the lenders' advantage in negotiations. They, quite reasonably, see that the worst case - liquidation, would result in a better result than the current plan.

The only other party under pressure without Fiat's clarification would be the Court. I don't believe the Supreme Court would rush a ruling based on the artificial pressure of the Administration and Fiat (who is getting something for nothing).

It was a good strategic move.

Now the Debtor side can wait for the Court to rule.

If the process takes a while, it actually could work to GM's detriment since good performance in Chrysler sales will bring the concept behind the "good business reason" standard into question.

Re Mr. Loeb's comment above -- "They (the lenders) quite reasonably see that the worst case -- liquidation, would result in a better result than the current plan."

I respectfully disagree. There is no assured financing for the operation of Chrysler. Without operations, the liquidation of Chrysler would be very ugly indeed, because the market is extremely thin for auto plants that aren't going concerns, or for unsold Chrysler inventory, or parts inventory.

These particular lenders are playing a dangerous game -- if they win at the S.Ct., they lose (and big). The sale will fall through, liquidation ensues, and the bondholders will be lucky to get 10 cents on the dollar. If the objecting bondholders cut a deal, it will have to be a deal for all the debenture issue, unless the rest of the debenture holders agree to let the squeaky wheel get a better return than the rest of the bondholders.

I'm not surprised that Fiat has said, "we'll walk." Why not? That happens in 363 sales all the time -- buyer says "my way or the highway." Who else is there? And they are right that Chrysler is actually a melting ice cube. It's losing market share and credibility by the week.

Funny how nobody ever took notice of the way 363 sales have re-shaped the way restructuring in bankruptcy is done before. Is that because, in the past, it was the secured creditors themselves who were pushing the 363 option? How ironic that it is a secured creditor who is complaining that 363 sales undermine the reorganization process.

Whoops. Errata on my part. I see now what Steve was talking about, with Fiat's CEO promising "never" to walk away from the deal.

But my take on that is that he was telling the dissenting bondholders not to hold their breath for any "reward" for their being obstreperous. He'll wait them out rather than pay them another dime.

I stand by my earlier comment though that the dissenting bondholders are sure in a pickle here. I think they're betting that the Administration will do anything to keep the company from failing -- including paying greenmail. If they're wrong, and they win at the S.Ct., then the sale fails. Depending on the Court's rationale, the GM deal might be in trouble too.

We live in interesting times.

I don't know why people keep referring to them as bondholders.

A bank syndicate made a First-Lien secured loan of $10.0 billion. Of that, $3.1 billion was paid down, leaving the remaining $6.9 billion of loans.

An analysis of the valuation report prepared by Capstone, which is the basis for Judge Gonzalez's determination of fairness, makes it clear that many of the assumptions were extremely aggressive towards arriving at a low valuation (see my discussion at http://blog.lawrencedloeb.com/2009/06/could-indiana-pensioners-have-prevailed.html).

There is no question whether Chrysler is worth more alive than dead. The question is whether or not the assets are worth more than $2.0 billion, and they are highly likely to be worth much more.

The 363(b) process has been rushed, preventing any discussion of the valuation. I wouldn't be surprised if that was one of the reasons that the accelerated process was chosen.

By the way, I'm not an attorney. I have over twenty years of experience in financial markets including six years of valuation experience (in a valuation firm) and seven years of investment banking experience working on mergers, acquisitions, capital raises, etc. I have also led the valuation of businesses in distress and in bankruptcy. This IS my area of expertise. The fact that Chrysler is private makes it difficult to provide an independent estimate of value, but a read of Capstone's report shows that it can be easily challenged (and I've successfully challenged other valuation opinions in litigation situations).

One sign that the valuation is aggressive is this explicit statement in the Greenhill opinion (see page 3 of Exhibit A of Bradley Robbins declaration at Docket 173):

"We express no opinion with respect to such Synergies, projections and data, including the Plan and the Liquidation Proceeds Analysis, or the assumptions upon which they are based. We have not made any independent valuation or appraisal of the assets or liabilities of the Company, or concerning the solvency or fair value of the Company, nor have we been furnished with any appraisals, except the Liquidation Proceeds Analysis. In particular, we do not express any opinion as to the value of any asset of the Company, whether at current market prices or in the future."

It's unusual for an investment bank to issue a fairness opinion without conducing any valuation work.

Actually, Mr. Loeb, the Greenhill boilerplate you cite is just that, and virtually identical boilerplate can be found attached to fairness opinions created since the beginning of time. Read carefully, you see that Greenhill explicitly hinges its opinion on the Liquidation Proceeds Analysis given to it by Chrysler(?). Investment banks *always* state in their opinions that they have relied exclusively on projections and analysis provided by company management and that they have not made any *independent* valuation or appraisal of the business or assets. This is standard operating procedure for nationally recognized investment banks. I am surprised that someone like you who claims substantial experience in this field would misunderstand this.

The boilerplate language that is usually included is reliance on management for financial reports, statements, etc. NOT VALUATION!

In fact, they often provide their own valuation analyses as part of their opinion.

They are expressing THEIR opinion as to fairness. Valuation is an integral part of determining fairness.

I've actually written these opinions.

It's not unprecedented, but it is unusual.

The comments to this entry are closed.


Current Guests

Follow Us On Twitter

Like Us on Facebook

  • Like Us on Facebook

    By "Liking" us on Facebook, you will receive excerpts of our posts in your Facebook news feed. (If you change your mind, you can undo it later.) Note that this is different than "Liking" our Facebook page, although a "Like" in either place will get you Credit Slips post on your Facebook news feed.

News Feed



  • As a public service, the University of Illinois College of Law operates Bankr-L, an e-mail list on which bankruptcy professionals can exchange information. Bankr-L is administered by one of the Credit Slips bloggers, Professor Robert M. Lawless of the University of Illinois. Although Bankr-L is a free service, membership is limited only to persons with a professional connection to the bankruptcy field (e.g., lawyer, accountant, academic, judge). To request a subscription on Bankr-L, click here to visit the page for the list and then click on the link for "Subscribe." After completing the information there, please also send an e-mail to Professor Lawless (rlawless@illinois.edu) with a short description of your professional connection to bankruptcy. A link to a URL with a professional bio or other identifying information would be great.