Chrysler amended, stand-alone plan would generate more value than proposed asset sale: Chrysler CFO

By Rebecca Melvin

New York, May 29 - A re-engineered stand-alone Chrysler LLC business plan presented to the U.S. Treasury Department on April 24 - but rejected by them like the original Feb. 17 plan - would have generated greater value than the asset-transfer involving Fiat SpA currently before the U.S. Bankruptcy Court for the Southern District of New York, Chrysler chief financial officer Ronald Kolka testified Friday.

Kolka said under the revised plan, a stand-alone Chrysler could have generated $1.8 billion in EBITDA in 2009, compared to the combined company, which would generate $300 million of EBITDA in 2009.

In 2010, a stand-alone that would have generated $4.6 billion in EBITDA, compared to the combined Fiat entity, which is projected to generate $3.7 billion of EBITDA.

The testimony supported the "sale" objectors, who feel that the U.S. Treasury overstepped in developing and promoting the current proposed plan that they contend is contrary to many aspects of bankruptcy law including the priority of senior lenders.

Of the original 351 objections - or 346, depending on which attorney is speaking - most were resolved by late Friday, but many, including those from dealers, tort victims, and the first-lien lenders, remained.

Those objections were based on assertions that the proposed plan is sub rosa and a violation of federal law, including the Troubled Asset Relief Program, provisions of the Emergency Economic Stabilization Act, and the Constitution of the United States. And that it fails to pass the sound business judgment test and failed to provide sufficient notice and due process.

After judge Arthur Gonzalez indicated that he was there to either approve or deny the plan, several attorneys representing dealer and tort victims called on the court to approve a modified plan.

"You have the ability to tell the debtor where they crossed the line, and where they can come back to the line," an attorney, representing the widow of an asbestos victim, said.

Best course in light of epic downturn

Meanwhile, Chrysler counsel argued that the bankruptcy and proposed transfer of assets, or sale motion, were necessary and the best course of action in light of circumstances including a credit crisis and unprecedented economic dislocation that caused U.S. auto sales to fall below a rate of 10 million vehicles per year. Currently sales are running at nine million vehicles per year.

Those circumstances "brought the industry to its knees and had them begging for funds from the U.S. government in the fourth quarter of 2008," Corinne Ball of Jones Day said.

"There is no other lender, no other bidder, and no other alternative, other than liquidation," Ball said. "So we have the transaction, and it has been confirmed that the sale will return a greater return than liquidation."

Ball was defending the bankrupt carmaker's motion to transfer substantially all of its assets to a new car company that will have investment from Fiat SpA and the U.S. Treasury.

Chrysler filed for bankruptcy on April 30 and Chrysler's Robert Nardelli said on the witness stand Thursday that he expected approval of the motion and emergence from bankruptcy as soon as Friday.

But judge Gonzalez, presiding over three days of testimony, with closing arguments continuing past Prospect News' deadline Friday, still hadn't taken a decision.

Proponents of the plan argued that Chrysler did exercise sound business judgment and "they were there," including on April 24 when Chrysler vied for a re-engineered plan, and on April 29, when the company tried to strike an 11th hour compromise with non-consenting lenders, an effort that was shut down by Treasury.

The U.S. Treasury had a "broader interest than economic return," Ball said. And there were few covenants in the acquisition facility.

There was no liquidity, and with Chrysler losing $100 million a day, the government demonstrated "limited tolerance for funding," Ball said.

'Chrysler is the guinea pig'

But the Indiana pensioners attorney cast it differently: despite the lender making loans that are clearly not market loans, and they are not going to be repaid for a larger purpose, there's no precedent for taking away value on a non-consensual basis and distributing it to junior lenders, counsel for the Indiana pensioners, Thomas Lauria of White & Case, said.

"What this really is, is a redistribution of going concern value, not contract law," Lauria said, adding that as a going concern Chrysler is worth $20 billion to $30 billion.

"What you have is a petulant lender, who only wants to pay the first-lien lenders a certain amount. And there is a case to be filed very soon following this model; and Chrysler is the guinea pig," Lauria said.

He asserted that this model will "totally change" the way companies are restructured, and "if we do it long enough, we won't have any lenders to worry about."

Lauria said the record shows Chrysler wanted to share information with is first-lien lender agent JP Morgan early in the process, and the record is devoid of a single incident in which Chrysler was able to take any step without the Treasury signing off on it.

"If the UST [U.S. Treasury] said this is the way it is, that was the way it was, sometimes forcefully," he said, adding that what started as a leveraging device became a habitual tool, and rewarding that abuse of power will result in a sham new car company, created "so that you didn't have to think about what everyone else is getting on the other side of the curtain. "

Under the proposed plan, the United Auto Workers' trust for retiree healthcare gets 68% of the stock of the new company, Fiat gets 20%, with the potential that that rises to 35% if certain milestones are met, and the Canadian and U.S. governments will own 12.31%, or 2.46% and 9.85%, respectively.

The UAW Veba also gets a note worth a little less than $5 billion, and the first-lien lenders get $2 billion cash.

202 objections resolved

The majority of objections, or 202 of them, came from cure and assumption rejections that were either resolved or will be addressed at two later hearings. Most state and local government objections were also resolved.

Other objections came from retirees and separated employees, those with tort and consumer claims, and several state and local governments.

But those whose tort claims are left behind in the old car company, the dealers and first-term lenders, didn't have their objections resolved.

"It was not in good faith that the U.S. government negotiated a settlement in which tort claims will have absolutely no recovery under old Chrysler," counsel for a tort claimant told the court.

Another attorney, representing a dealer who was among 789 dealers cut from the Chrysler dealership franchise, said: "One of the duties of this court is to protect the rights of creditors."

A third attorney, who said he had been a bankruptcy lawyer for a "long, long, long time," had never seen such a significant case proceed on such short notice, and he said there was no due process.

Counsel for the Indiana pensioners said the government coerced the asset transfer plan and that it doesn't have authority to buy a company, and is not authorized to designate TARP funds to an auto company.

The government has opened itself up to lender liability, the attorney said: "If you act like an owner, you get treated like an owner and that violates TARP, it's overstepping."

The objectors said the proposed section 363 sale should have been a full blown plan that would have afforded voting rights to stakeholders, as well as other statutes.

Chrysler, an Auburn Hills, Mich.-based automotive company, filed for bankruptcy on April 30. Its Chapter 11 case number is 09-50002.

© 2015 Prospect News.
All content on this website is protected by copyright law in the U.S. and elsewhere. For the use of the person downloading only.
Redistribution and copying are prohibited by law without written permission in advance from Prospect News.
Redistribution or copying includes e-mailing, printing multiple copies or any other form of reproduction.