Chrysler Creditors Disagree on U.S. Plan to Cut Carmaker's Debt
Some Chrysler's creditors are balking at a plan that would value the debt at 15 cents on the dollar.
(By Douglas C. Pizac -- Associated Press)
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Saturday, April 11, 2009
A dispute has erupted involving the creditors of Chrysler who are negotiating with the federal government to reduce the beleaguered automaker's debt load.
Some banks and hedge funds are balking at the offer made by the Treasury Department at a meeting in Washington late last week that would wipe out 85 percent of the $7 billion owed to them, according to people familiar with the matter.
But others say the government's offer is not unreasonable, given the meager price the bonds are fetching right now.
Large banks, along with several dozen hedge funds, hold $7 billion in senior secured loans to Chrysler and are the first in line to Chrysler's assets should the company go into bankruptcy. The group includes Citigroup, Morgan Stanley, J.P. Morgan Chase and Goldman Sachs, and hedge fund Elliott Management.
President Obama gave Chrysler, which has received $4 billion in federal loans, until the end of the month to reach an agreement with creditors to reduce its debt load, as well as to negotiate concessions from the United Auto Workers and to complete an alliance with Italy's Fiat. If Chrysler succeeds, it will receive additional government loans. Otherwise, it faces bankruptcy.
Again and again, the Treasury has demanded sacrifices from all sides. Yet, while it did say it would like to see the automakers' unsecured debt reduced by two-thirds, it has not set targets for secured creditors.
To aid Chrysler's restructuring, the company's two owners, Daimler and Cerberus Capital Management, have pledged in Chrysler's February restructuring plan to relinquish their equity and convert all of their second-lien loans, totaling $2 billion, to equity.
Senior officials of the Obama administration presented the banks with an offer to recoup about $1 billion of the $7 billion in a meeting at the Treasury Department, which was also attended by representatives from Chrysler and Fiat, people familiar with the situation said.
Some in the consortium think that offer is much too low and are incredulous that the government is asking them to give up so much before other creditors have made similar sacrifices.
"Whether it's a bankruptcy or a restructuring, you would wipe out the senior lenders group last," said a person in the lender group who is familiar with the negotiations but spoke on condition of anonymity because he was not authorized to speak publicly. "We all realize that some pain is going to have to be shed. But sacrificing 85 percent at the top of the capital structure just doesn't make sense."
That said, the banks realize a bankruptcy is not in anyone's interest and are waiting to receive the specifics of Chrysler's financial situation so the lenders can come up with a counteroffer.
A Starting Offer
The offer from the Treasury was not an ultimatum, but a starting offer, and discussions are ongoing, several people with knowledge of the matter said.
