Two of the US top automakers will soon be controlled by their retirees and the Government. Today, Chrysler announced it would file for Chapter 11 bankruptcy. The current plan results in the UAW owning 55%, the US Government owning 8%, and the Canadian Government owning 2%; additionally, Fiat would initially own 20%. Under the current proposal, the UAW and the US Government would own 89% of General Motors. In both cases, the bondholders are crying foul. The secured lenders would like to preserve the integrity of the US capital markets. The table below breaks down the proposals:
Source: Barron's
In General Motors case, the bondholders are looking for a greater equity stake given there secured position. The bondholders’ counterproposal calls for a division of equity in accordance to claims against GM; the bondholders would receive 58%, VEBA (UAW health-care obligation entity) receive 41%, and current equity holders would retain 1%. The Government’s $20 billion loan would remain just that, a loan.
Likewise, a group of investment firms were blamed for the Chrysler bankruptcy. Obama stated,
“While many stakeholders made sacrifices and worked constructively, I have to tell you, some did not,” Obama said. “In particular, a group of investment firms and hedge funds decided to hold out for the prospect of an unjustified tax payer-funded bailout.
Where as, the group of 20 hedge funds said they were ‘systematically precluded’ from negotiating with the Government and Chrysler. The hedge funds’ disapproval of the bankruptcy is warranted; Obama felt a group of creditors owning 70% of the debt were cooperating. This group of creditors, Goldman Sachs, JPMorgan, Morgan Stanley, and Citigroup are fresh of long meetings with Congress trying to save their good names. Those entities have received billions in TARP funds and in Citi’s case the US Government is a significant shareholder. Huge conflicts of interest exist with the 'banks.'
In both the GM and Chrysler case, the bondholders’ proposals appear to have fallen on deaf ears. The bondholders have been accused of speculating, but many of these individuals and entities make a living, albeit a good one, restructuring firms. Some of these firms need only a new balance sheet, while others require a significant shift in strategy – the automakers fall in the later. Neither party and neither administration is innocent; the US Government Officials appear to make a living changing the rules in the middle the game, not balancing budgets, and monetizing the debt.
Changing the rules continues to put pressure on the stagnant credit markets. The regulatory risk premium on loans makes it difficult for lenders to put money to work. Credit investing is based heavily on legal documents and understanding the course of action when a debtor breaks a covenant or defaults on their obligation. The most successful creditors have extensive experience negotiating with the debtors for creative structures to allow the companies to continue to operate (hopefully profitably) and continue to service the outstanding or restructured debt. Lenders are perhaps fearful that all new and existing credit agreements can be amended or simply place in the vertical file by the current administration.
Obama’s claim that hedge fund holders are holding out for a bail out may indeed by the case. With the exception of Lehman Brothers, the Government has shown a strong appetite for throwing money at all ‘systemic’ institutions; most of which were financial institutions. The probability of future Government aid was probable, but the restrictive nature is far from preferable. These speculating investment firms likely felt the implicit Government backstop place nothing more than a floor on their investment. A value creating restructuring would provide a far greater return on investment than additional Government equity or loans.
Furthermore, the investment firms often do create value for multiple stakeholders. GM bondholders claim their proposal would save US taxpayers $10 billion; the new structure would enable GM to service the Government debt, ultimately resulting in the return of principle and interest. A prudent restructuring of both Chrysler and GM can at least return a few flagship brands to the world of mediocrity.
The Obama administration is preaching fuel efficiency, the probably should be preaching sales. People are buying Japanese and German automobiles because of style, performance, and reliability. The Government cannot design automobiles, manage a diversified investment institution, or price debt securities. The faithful public servants need to stick to public policy. America’s meteoric rise to the World economic superpower was a rocky road for the first 160 years. After the Great Depression, America was surprisingly stable; short sighted policies today run the risk of stifle the growth and innovation of the next 160 years.
In both the GM and Chrysler case, the bondholders’ proposals appear to have fallen on deaf ears. The bondholders have been accused of speculating, but many of these individuals and entities make a living, albeit a good one, restructuring firms. Some of these firms need only a new balance sheet, while others require a significant shift in strategy – the automakers fall in the later. Neither party and neither administration is innocent; the US Government Officials appear to make a living changing the rules in the middle the game, not balancing budgets, and monetizing the debt.
Changing the rules continues to put pressure on the stagnant credit markets. The regulatory risk premium on loans makes it difficult for lenders to put money to work. Credit investing is based heavily on legal documents and understanding the course of action when a debtor breaks a covenant or defaults on their obligation. The most successful creditors have extensive experience negotiating with the debtors for creative structures to allow the companies to continue to operate (hopefully profitably) and continue to service the outstanding or restructured debt. Lenders are perhaps fearful that all new and existing credit agreements can be amended or simply place in the vertical file by the current administration.
Obama’s claim that hedge fund holders are holding out for a bail out may indeed by the case. With the exception of Lehman Brothers, the Government has shown a strong appetite for throwing money at all ‘systemic’ institutions; most of which were financial institutions. The probability of future Government aid was probable, but the restrictive nature is far from preferable. These speculating investment firms likely felt the implicit Government backstop place nothing more than a floor on their investment. A value creating restructuring would provide a far greater return on investment than additional Government equity or loans.
Furthermore, the investment firms often do create value for multiple stakeholders. GM bondholders claim their proposal would save US taxpayers $10 billion; the new structure would enable GM to service the Government debt, ultimately resulting in the return of principle and interest. A prudent restructuring of both Chrysler and GM can at least return a few flagship brands to the world of mediocrity.
The Obama administration is preaching fuel efficiency, the probably should be preaching sales. People are buying Japanese and German automobiles because of style, performance, and reliability. The Government cannot design automobiles, manage a diversified investment institution, or price debt securities. The faithful public servants need to stick to public policy. America’s meteoric rise to the World economic superpower was a rocky road for the first 160 years. After the Great Depression, America was surprisingly stable; short sighted policies today run the risk of stifle the growth and innovation of the next 160 years.
Posts
No comments:
Post a Comment