Wednesday, June 3, 2009

How Has The Chrysler Case Impacted Distressed Investing?

On Sunday night, Judge Gonzalez published his opinion allowing the Chrysler sale to go through (pending an appeal to the Second U.S. Circuit Court of Appeals in New York, with oral arguments to start Friday June 5th).

After reading his opinion, my conclusion is NO, the case will not have an impact on distressed investing.

The Government's heavy involvement in the case (and the impact of that involvement) are unprecedented, but unlikely to occur again. I believe that involvement will have limited (if any) impact on lending or distressed investing.

The likelihood of any attempt to repeat this involvement is de minimis; and the lack of any judicial review (at least yet) of the Government's behavior means that any future attempts may not be successful (if the opinion had touched on the Government's role, other than the passing discussion in the opinion, then THAT would have been very troubling).

The specific circumstances of this case are so unusual that, I believe, banks and investors will consider them to be the equivalent of being struck by lightning (you can't live your life ducking a lightning strike that is almost certain to never come).

I was pleasantly surprised that, even thought the Judge decided to allow the sale, the opinion didn't address the issues that I believed could have negatively impacted credit markets, particularly the distressed investing and secured lending markets (I will address this in another post).

The Judge, based on the arguments presented, concluded:

  • there are exigent circumstances, providing a good business reason for the sale of substantially all the assets in a 363(b) sale (as required by Lionel);

  • the planned 363(b) sale was not a sub rosa plan because "The Debtors are receiving fair value for the assets being sold. Not one penny of value of the Debtors' assets is going to anyone other than the First-Lien Lenders." He relied on the Capstone testimony WHICH WAS NOT REBUTTED;

  • the collateral securing the first lien was worth $2.0 billion (so there was no violation of 363(f); and

  • the transaction is fair, as supported by the extensive sale process and no better offer.

The Judge stated that "the First-Lien Lenders will receive a greater return under the proposed sale, which reflects the going concern value, than under a piecemeal liquidation."

This conclusion is, in my opinion, well reasoned. I think the conclusion is wrong, but the Judge could only rule on the evidence presented to him.

I will present my thoughts on this in a separate post.

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