Great editorial in the Wall Street Journal that was passed on to me by my friend Warrick on Twitter. The article is titled: Chrysler and the Rule of Law, and covers the pressure the Obama administration is putting on Chrysler creditors. The secured creditors (senior position - first in line) are being asked to take 30 cents on the dollar while the union, who is unsecured (second in line) is getting 50 cents on the dollar. This is not the way bankruptcy works...ever. The company satisfies the senior position and the remaining proceeds goes to unsecured. This is why senior debt (typically bank debt or bonds) is far cheaper then sub-debt, because there is a higher recovery value so you are not taking as much risk.
I don't have a big problem with the administration trying to put some PR pressure on the creditors, as long as the creditors can say no. Yes, they'll lose the PR war but they'll get what is entitled to them. They're big boys and girls and tough decisions and some heat come with the territory. However, there is a second part of this process that could hurt the creditors and that is a quick asset sale to Fiat. The Government wants the quick sale to keep the company together a little better, make the problem go away faster and because it's a leverage point with the creditors. In a drawn out bankruptcy, the creditors will be able to jockey and fight for their rights, and will get a much larger piece of proceeds than what the administration is offering. If the forced sale is pushed through, the creditors get a sub-optimal return. That is the threat right now to creditors. Hopefully the Administration does the right thing and takes some time to sort out the mess, and respects the rights of proceeds that come with lien position. It's a really important component of the lending world and needs to be respected.