A new report by Moody's says debt investors need not be alarmed by the unusual treatment of secured debt holders in the
In the case, which ended June 10, when Chrysler emerged from bankruptcy court protection, secured creditors did not receive 100 cents on the dollar, overriding their historic right to be paid in full before unsecured, lower priority claims are paid.
That probably won't happen again, Moody's says.
"The government involvement in this bankruptcy was unprecedented," says Moody's analyst Alexander Dill. The government provided debtor-in-possession financing to get the company through bankruptcy, "had a big stake, and didn't want the company to liquidate," he said.
As a result, the government called the tune, to an extent that is unlikely to become commonplace, although the same factors will be at play in the ongoing bankruptcy of
, he says.
In a recent report, Dill questioned the significance of the Chrysler case "for future creditors of companies seeking protection under Chapter 11.
"The outcome is being widely debated, both in the bankruptcy bar and among credit professionals in general, and no consensus is apparent," he wrote."Moody's believes that the case does not herald a new regime for secured creditors."
In the case, three Indiana pension funds, which had paid about 43 cents on the dollar for $42 billion of the $6.9 billion in secured loans to the company, were the sole holdouts. They appealed a bankruptcy court ruling, which subjugated their claim, to an appeals court and then to the Supreme Court.
Although the pension funds bought debt at a discount, the claims should not be dismissed, Dill said, because "it's important to have these players create a liquid market in secondary markets."
However, he wrote, first priority for secured claims is applied in a typical bankruptcy, which provides for a company's restructuring, rather than in the context of a 363 sale. Additionally, in the Chrysler case, the government could argue that without the funding it provided, the secured creditors would have received less than they did.
The bankruptcy process can be unpredictable, Dill says. The goal is to balance two priorities: a fresh start for the debtor and a fair outcome for the creditors. "Chrysler shifted the process sharply in favor of the Code's policy goal of giving a debtor a fresh start," Dill wrote.
In the ongoing GM bankruptcy, the government is again in the driver's seat. "It's different from Chrysler in terms of the configuration of creditor stakeholders -- there's not going to be an issue with the secured lenders," Dill says. "However, there could be issues in terms of how you treat different unsecured claims."
In the GM case, the Voluntary Employee Beneficiary Association, a retiree health care trust fund administered by the United Auto Workers, is slated to receive 17.5% of the new GM, as well as a $2.5 billion note and $6.5 billion in preferred stock paying 9% interest; and a board seat. This is in return for $20 billion in debt.
In return for $27 billion in debt, bondholders would get 10% of the stock as well as warrants to purchase up to 15% more. Last month, the Ad Hoc Committee of GM bondholders, which represents holders of about 20% of the $27 billion in unsecured GM debt, signed on to the deal. However, in a prepared statement, the group said it "continues to remain troubled by preferential treatment that the UAW VEBA is receiving."