Thursday, May 07, 2009

Painful lessons for Chrysler lenders

Another important article from the Financial Times that I wanted to add to the blog (after adding it to the Finance Trends twitter page), this time on the subject of Chrysler's 'dissident' senior lenders.

Here's an excerpt from, "Painful lessons for lenders in Chrysler debacle":

"George Schultze will think twice before lending to another troubled company such as Chrysler.

Mr Schultze is one of a group of dissident Chrysler creditors who was rebuked by the US president and other lawmakers for tipping the company into bankruptcy. He rejected an offer aimed at slashing Chrysler’s debt in order to allow the carmaker to be sold. Mr Schultze and other investors – some of whom claim to have received death threats – say the deal is unfair because it does not honour their rights as senior lenders to get paid before other claims, such as a union benefit plan, are met.

They also argue that the deal was orchestrated by the US government, which held sway over the majority of the other lenders, namely a group of banks, following widespread bail-outs.

The question of whether the Chrysler creditors got a raw deal will be decided in a New York bankruptcy court over the next few weeks.

Already, the verdict on Wall Street and in the conference rooms of investment firms round the country is that, at the very least, the situation raises questions about the solidity of time-honoured lending principles and parts of the bankruptcy code. These rules dictate the pecking order for claims to be repaid when a company files for Chapter 11... "

As one distressed debt investor who was quoted in the article said, "Now there is a new risk: government intervention risk...And it is very hard to hedge.".

So, who thinks that problems with uncertainty over bankruptcy procedures and contract law is a growing trend in the US?

Related articles and posts:

1. Justice for all, except bondholders -

2. Chrysler's greedy hedge fund holdouts get it right - Bloomberg.