The lenders argued that Platinum was a puppet of the government and GM, which needs Delphi to emerge from bankruptcy for its GM bailout to succeed. Platinum "is an entity funded principally by GM (and thus controlled by the Auto Task Force) in which GM's and the Auto Task Force's hand-picked private-equity buyout partner Platinum provides the appearance of an independent third-party in exchange for disproportionate economic returns," wrote lawyers for a group of lenders in court papers.
The lenders "believe that the GM-Platinum transaction will siphon an extraordinary amount of value from Delphi's stakeholders to Platinum by offering Platinum rewards incommensurate to its relatively modest investments," wrote separate lawyers for J.P. Morgan, the agent on a $4.5 billion loan provided to Delphi in 2007 so it could continue to operate under Chapter 11.
The plan calls for some DIP lenders, including the most senior creditors owed about $2.5 billion, to receive 20 cents on the dollar for their loans. These lenders argue that Delphi's plan overstates the amount they would receive. A Delphi reorganization plan that collapsed in April 2008 called for DIP lenders to receive full payment.
If true, this is an even more heavy-handed intervention than Chrysler, and considerably more disturbing. Debtor-in-Possession financing, or DIP, is the financing that allows companies to reorganize in bankruptcy. It's senior to everything else because if it weren't, no one would be willing to lend money to companies that definitionally have a high probability of failure. Stiffing those creditors in order to make GM, or even Delphi, better off, is incredibly short-sighted.
It also has some potentially scary implications for our political economy. The quasi-legitimate argument in favor of the government's interventions in favor of the UAW was that Uncle Sam was the only available debtor-in-possession financier, and therefore had a right to call the tune. Screwing over the DIP providers would, of course, make it harder for other companies to get DIP. What new rights could the government discover in those bankruptcies?
In this case, however, the bankruptcy judge wasn't buying. He ordered Delphi to put its assets up for auction. Now we get to test the theory that the government is acting in ways that actually make all the creditors getting cramdowns better off. If the government has indeed been acting in everyone's best interest, the auction will be a dismal failure. Either way, however, the judge has gone a long way to limiting the scope of the damage from the previous automaker interventions, by demonstrating that the courts are willing to put real limits on the ability of administrations to rearrange economic transactions at will.
The crux of the matter. I'll be anxious on your reports of how events progress here.
I'm curious if this could lead to a dismantling of Delphi, leading to other problems for GM that might have been avoided had the judge towed the administration line.
Just a terminology note: Perhaps "administration" would be a better term to use here than "government?" I'm pretty sure the bankruptcy judge is also ultimately part of the government.
With GM or Chrysler -- lenders might be able to rationalize the administration's actions as an exceptional response to a unique situation.
If the administration jams yets another group of creditors, an unmistakable pattern will emerge.
Heaven help any manufacturer with a large unionized workforce -- the cost of borrowing, assuming somebody will lend to them at all, will go through the roof.
The administrations actions to save high profile union jobs at GM and Delphi may actually result many more union jobs killed (invisibly) as a result of the much higher capital costs on the hundreds of similiar firms.
The administrations actions to save high profile union jobs at GM and Delphi may actually result many more union jobs killed (invisibly) as a result of the much higher capital costs on the hundreds of similiar firms.
And no Karl Rove to blame for this backhanded workmanship of insidious right-wing genius?
Maybe his mind control powers work remotely...
Heaven help any manufacturer with a large unionized workforce -- the cost of borrowing, assuming somebody will lend to them at all, will go through the roof.
At which point the "progressive" elements of the government will require lenders to make loans to such companies just like they did in the situation where banks were forced to make loans to people to buy homes that all rational statistical analysis showed were likely to default on such loans.
Its truly amazing to watch the politician idiots at play. They mandate policies that fly in the face of reality and when the bill for their insanity comes due it is always someone else's fault--and the cure is--more insanity. After all, if we just pass the right laws rocks, when dropped, will fall up instead of down. Ah--the Audacity of Incompetence.
Maybe they will 'persuade' banks that took TARP funds to make loans.
An alternative view of this might not be "large union," but "too big to be allowed to fail," union or no union.
Heaven help any manufacturer with a large unionized workforce -- the cost of borrowing, assuming somebody will lend to them at all, will go through the roof.
What percentage of the interest rate for ordinary bonds is determined by what the a DIP creditor gets in bankruptcy? For that matter, what percentage of the interest rate is determined by a fine calculation of the outcome of bankruptcy, as opposed to the probability of bankruptcy itself? This sort of thing might clobber the vulture market, but realistically, when you buy your "income" mutual fund, are you fussing over 20% bankruptcy payouts over 40%?
I'm not in favor of upsetting the orderly pre-established bankruptcy rules, but we could be overstating the case here.
"What percentage of the interest rate for ordinary bonds is determined by what the a DIP creditor gets in bankruptcy? For that matter, what percentage of the interest rate is determined by a fine calculation of the outcome of bankruptcy, as opposed to the probability of bankruptcy itself?"
My first response was "100%", because the loan is constantly under review, with the rate reset depending on circumstances.
You seem to think of financing as a static state, rather than a dynamic one. For consumers, it sometimes is a state state--e.g., 30 year fixed home mortgage--but commercial lending is a different beast.
Commercial lenders establish an interest rate after assuring themselves they are the first lien holders and after studying the risk profile of the borrower. The loan rate established by that underwriting process is, in reality, essentially "reset" every day of the loan by the covenants the borrower entered into. Those covenants give the lender an "out", via calling the loan or raising the interest rate, if the borrower's risk profile changes.
So if a lender determines that, despite his best efforts, his loan terms are wholly subject to the politcal situation,...well, good luck getting underwritten in that environment. Almost no rate of interest will compensate you for a loan that will not get repaid.
"What percentage of the interest rate for ordinary bonds is determined by what the a DIP creditor gets in bankruptcy? For that matter, what percentage of the interest rate is determined by a fine calculation of the outcome of bankruptcy, as opposed to the probability of bankruptcy itself?"
I think that phrases the question altogether too narrowly. As the Obama administration establishes a pattern of trampling the rule of law and settled market expectations in order to benefit a favored political constituency, debt investors will inevitably start to price in political risk when lending to US corporates with large unionized workforces. How much will this cost those companies in the end? Impossible to say. Probably won't reach the level of the political risk premium charged to Russian companies, for example, but it will reduce one of the few remaining competitive advantages held by US companies - the ability to borrow at lower rates because of the perceived stability and neutrality of the US legal system.
The irony is delicious.
In ancient Greece the sibyl, drunk on ethylene gas, would rave, and her ravenings would be translated by priests into elegant hexameters that would advise people as to what to do. We now have the ravenings of politicians intoxicated by power re-interpreted by our priestly courts ("all rise") into elegant bankruptcy code.
Some of the sibyl's more famous predictions were for the Athenians to trust their ships to defend them from Persia, or for Lysander, leader of the victorious Spartans in the Peloppenisian War, to watch his back (before he was assassinated). Let's hope our modern-day sibyls will be as successful.
So if a lender determines that, despite his best efforts, his loan terms are wholly subject to the politcal situation...
Well, fine, but there's no sign (yet) that terms are "wholly," or even partially, subject to the political situation. Most companies do not go bankrupt promptly after receiving a loan. A company that is manifestly nearing bankruptcy will have a hard time borrowing regardless of the political situation.
What we have here is the administration meddling with the results in bankrutcy, which is an extreme case. How much does changing the rules for extreme cases really change the prices for non-extreme cases?
Did you miss the "debtor in possession" part? You know the lenders that lend money to the company AFTER bankruptcy? You know, the debt that's superior to ALL other debt?
That's SOP in chapter 11s. Now Obama is trying to screw that up. What you'll end up with a a bunch of Chapter 7s rather than 11s, because the Chap 11 company won't be able to get DIP financing, if the gov't is going to unilaterally declare the the DIP lenders only whatever the gov't. decides so as to favor their political friends, like the UAW.
Did you miss the "debtor in possession" part? '
No. See my original comment, with a quote from marketkarma which does not seem to be limited to DIP. Also, see much of the heavy breathing about screwing the GM secured creditors and the likely impact on the cost of borrowing.
I find it hard to believe--although I'm open to persuasion by those who know more--that the dominant factor in most commercial lending are the bankruptcy rules, or lack thereof.
A lender knowing his priority in a future liquidation may well be *the* dominant factor in the lending decision. If a lender cannot know if he will be behind another party in liquidation, he cannot price his loan properly. A loan that cannot be priced will not be made, generally speaking, unless the government is the lender.
Same for investors, workers, trade suppliers, and almost anyone else working on credit--which is everyone not being paid in cash immediately upon delivery or provision of service. If, as a creditor, you don't have a good sense of where you stand relative to other financing sources and creditors, you typically deal in cash.
And try and run a modern economy on largely cash basis, without credit from many, many sources, not just banks. Go ahead, try.
People understand the modern bankruptcy priorities and workout results so well that actual bankruptcies are fairly rare. Why fight over the scraps when everyone knows who will get them anyway? The last several decades of relative certainty likely made it easier to be a secured creditor, since you knew you would not face a lot of static from way-down unsecured parties hoping to rewrite credit terms post-loss.
But now, well, things may be a-changing regarding those rules. That is what people are wondering about, and concerned about. And when you have uncertainty in pricing environments, you will likely find money still lent, but at a more dear price.
"What percentage of the interest rate for ordinary bonds is determined by what the a DIP creditor gets in bankruptcy? For that matter, what percentage of the interest rate is determined by a fine calculation of the outcome of bankruptcy, as opposed to the probability of bankruptcy itself?"
To get a feel for the likely cost, we could look at the difference in yields between senior and subordinated debt for the same company. Basically, one could argue that companies with a large union presence will no longer be able to issue senior debt, regardless of the contract terms, because Obama can always put the unions ahead of the senior (even secured) creditors in line. So their senior debt will have to pay what junior debt would otherwise have paid, and their junior debt will have to pay even more.
If you were questioning whether the expected payout in bankruptcy makes a noticeable difference in borrowing costs for healthy companies, the spread between senior and junior debt from the same issuer is enough to show that such differences are priced by the market and have an effect on borrowing costs.
But that spread was written in an environment of ordered financing and commonly-understood rules.
Suggest to lenders in that same circumstance that you may take away the rules ex post, and then see what the spread is.
To get a feel for the likely cost, we could look at the difference in yields between senior and subordinated debt for the same company.
Right, so there's my answer. I should have thought of that.
And so we see that heavily-unionized companies will still be able to borrow, and will presumably pay some rate in between the current senior and junior rates for similar companies. So cost of capital goes up, yes, but this isn't necessarily a catastrophic we're-all-gonna-die situation. Yet, anyway.
The difference is, the subordinated creditors know roughly how much senior debt there is above them in the tree. If union contracts can simply be promoted at will, your risk rises dramatically.
Good point! We're moving from a pretty well specified situation to one with substantial uncertainty, so the premium should certainly be larger.
my original point may have had more drama in it than was justified..
but,
given the trevails of Chrysler and GM, presumably there are a whole population of parts suppliers, many if not all union shops, who are trying to survive a period of great uncertainty and financial challenges.
The administrations actions have made these firms even less attractive to lenders than they had been before, at a time when getting capital is more important than ever.
The uncertainty associated where a lender really is on the repayment pecking order serves as an enormous disincentive to make loans into those situations.
Rob -
Your broader point is correct - these interventions don't mean that unionized companies will be shut out completely. But they certainly mean higher costs of capital and thus slower growth and less value created, all so that Obama can indulge in personal whims and vote-buying.
And if there continue to be other interventions, for example to force more green technology, cap the pay of more and more people, etc., there is less and less incentive for businesses to take on new investments. What people sometimes seem to forget is that, before you can 'redistribute' wealth to suit your own purposes, someone has to create that wealth. Wealth creation is being heavily discouraged by this administration.
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"Now we get to test the theory that the government is acting in ways that actually make all the creditors getting cramdowns better off. If the government has indeed been acting in everyone's best interest, the auction will be a dismal failure."
I'm not sure your logic follows here. The administration has most likely, in rescuing GM & Chrysler, increased the value of future bids dramatically relative to what might have been expected from independent third parties had those two companies been allowed to fail. I don't disagree with you that the government's fast and loose way with bankruptcy law is detrimental, but I do disagree with you as to how future bids for this company should now be interpreted.