Fear and Greed Blog

After today's ruling by District Court Judge Thomas Griesa (see Reuters report), it appears that the 363(b) sale will go through today.

Judge Griesa was quoted as saying "I'm convinced that the issues you raise are issues," but he wanted the Bankruptcy Court to rule on the case. As I understand it, Judge Griesa feels that any damages could be cured if a problem is found with the sale in a future appeal and a stay, therefore, was not required to protect the Indiana pensioners' rights. They have not yet posted Judge Griesa's opinion on the web site for the United States District Court, Southern District of New York, so I am basing this on published reports.

The main obstacle to the sale now appears to be time. Jones Day filed an agenda for today's hearing that is 56 pages long! The agenda shows estimates the length of the hearing on the 363(b) sale to be "Approximately 10 hours or more." The hearing is scheduled to start at 10:20 AM. If their estimate is correct, and assuming one hour each for lunch and dinner, they MIGHT be done at 10:20 PM.

I am surprised that the valuation prepared by Capstone (here is the revised valuation) hasn't been challenged in Court. While I don't have sufficient information to perform a valuation, the assumptions made in Capstone's analysis seem vulnerable to criticism. For example, Capstone projects that brand new cars could only be sold at 25% to 35% of their cost (citing the lack of a warranty as one issue).

If you assume that Chrysler receives no margin above their cost and the MSRP assumes a 10% mark-up at the Dealer, then, they are saying that a car with an MSRP of $20,000 could only be sold if the price was marked down to between $4,500 and $6,300 (the cost basis would be $18,000).

I would expect that there is some insurance company that would be willing to provide 5 year/50,000 mile insurance for these cars at some cost that would provide Chrysler with a greater recovery.

According to the Capstone report, there was $1,848 million in new vehicles in Chrysler's inventory at March 31, 2009. If you increase the recoveries to 50 to 70 percent of cost (or $9,000 to $12,600 in our example), that increases the overall valuation by between $462 million to $647 million.

The report also assumes that receivables with a book value of $1,464 million would generate only between $0 and $73 million in recoveries. The explanation for this is that the parties that owe these amounts are also creditors of Chrysler and that they would offset these other liabilities, reducing the recoveries. I'm not a lawyer, but according to my understanding of the Bankruptcy Code, they would have to pay the amounts owed and stand in line with the unsecured creditors - not simply offset the amounts. It is my understanding that, should the parties attempt such offsets, the Estate would be able to sue and recover those funds (or a substantial portion of them).

Despite predicting overall recoveries of between negative $264 million and $1,630 million, the Capstone report assumes that the wind down costs will range from $1,822 million to $2,466 million in a liquidation (including professional fees of between $142 million and $154 million). That seems rather a rather high cost for such limited recoveries.

The wind down costs seem to indicate an assumption of an orderly liquidation, but the presented recovery values appear, given the limited information available, to be calculated based on a forced liquidation assumption (recoveries are generally much lower in a forced liquidation than in a liquidation that is performed in an orderly fashion).

Since this valuation is a vital aspect of Chrysler's justification of the proceeds in the 363(b) sale, I would have expected some sort of challenge made by opposing counsel.

Since I'm not a lawyer, my expectations could be unrealistic. Perhaps there are procedures limiting the availability of experts, but such a challenge would certainly have been possible had the bankruptcy gone through a typical Chapter 11 process (as opposed to this accelerated sale).

The docket (available online) is now up to 2,561 items (plus exhibits, appendices, etc.).

Today's filing included Chrysler's Supplemental Memorandum of Law in support of the 363 sale. This document is quite interesting, but the attachments provide information that I haven't seen before. This includes the AMENDED AND RESTATED FIRST LIEN CREDIT AGREEMENT (dated November 29, 2007), the FIRST AMENDMENT AND CONSENT to the AMENDED AND RESTATED FIRST LIEN CREDIT AGREEMENT (dated January 2, 2009), the SECOND AMENDMENT AND CONSENT to the AMENDED AND RESTATED FIRST LIEN CREDIT AGREEMENT (dated April 6, 2009), the THIRD AMENDMENT AND CONSENT to the AMENDED AND RESTATED FIRST LIEN CREDIT AGREEMENT (dated April 24, 2009), the original SECURITY AGREEMENT (dated August 3, 2007), the SECOND AMENDED AND RESTATED COLLATERAL TRUST AGREEMENT (dated January 2, 2008), and the proposed (and unsigned) CONSENT TO SALE AND LIQUIDATION OF COLLATERAL. The executed credit agreements give an idea of who the first lien lenders were at specific times. The Indiana pension funds are not signatories to the last amendment, so they must have been represented by one of the firms that did sign.

We should hear more later today.