Wednesday, June 10, 2009

A Puzzling Commentary by Felix Salmon

Felix Salmon posted this piece on his blog, which had a number of statements that I found puzzling. He seems to be suggesting that Tom Lauria's clients got more than they deserved based on this piece from The Wall Street Journal that relied entirely on (ultimately) Capstone's final report.

He is questioning this editorial from The Detroit News, which suggests that the Chrysler bankruptcy may make it harder for companies borrow; a point that I had made here (quoting a piece from The Wall Street Journal, coincidentally).

Here is my reply (which is currently awaiting moderation) - I have cleaned up the links here - that functionality did not appear available to commenters to Mr. Salmon's blog:


Have you read the valuation reports prepared by Capstone (available at, Docket 52 - later version at Docket 1573)? Did you read Greenhill’s fairness opinion (Docket 173 - which specifically states that they did NO VALUATION WORK in arriving at their conclusions)?

The valuation of Chrysler in liquidation was based on a report that never had to withstand real scrutiny (but Greenhill’s CYA statement should give you an idea that they weren’t ready to comment on it - typically investment banks PERFORM valuations to come to support their opinion).

Furthermore, as pointed out in Lauria’s application to the Supreme Court, the appropriate basis for valuation of secured assets under the Bankruptcy Code is based on how the assets will be employed post-bankruptcy (citing Justice Ginsburg’s opinion in Associates Commercial v. Rash). The assets here are to be used as part of a going concern, so liquidation is NOT the basis that should be used in valuing the secured assets (rather, it should be based on their going concern value - which was never established).

I don’t understand the logic of your statement “The fact that unsecured creditors (the UAW) are getting some recovery from the Chrysler bankruptcy even though secured creditors are taking a haircut is actually good for the secured creditors: it means they’re getting more than they otherwise would be able to salvage out of a liquidation.”

Secured creditors are supposed to be paid off completely, to the value of the assets they are secured against, before unsecureds receive ANYTHING. Furthermore, to the extent that the secured loan exceeds the value of the assets securing it, the loan becomes unsecured and shares pari passu with the other unsecureds.

I don’t know how it’s good for the secured lenders to take a haircut while the unsecureds receive more than the secureds.

In this case, the VEBA is receiving consideration valued at $10.337 billion (Judge Gonzalez decided that this was a payment by NewChrysler, unrelated to the $10.5 billion the Estate owed to the VEBA, but NewChrysler is getting nothing of value in return for the payment) while the first-lien lenders are receiving $2.0 billion on a $6.9 billion secured loan.

It is highly likely that, had this case proceeded at a less frantic pace, the valuation would have been contested and the result quite different.

Of course, it is easy to speculate on what might have been, but there WAS a case to be made for the secured creditors. It didn’t help that the other holders of the first-lien loans were beneficiaries of TARP (and then there are the, unproven, charges of threats against the original group of “Non-TARP” lenders).

There is an excellent article at The Deal on some of these issues.

I wrote a fair amount about the case on my blog as well, including my thoughts on how the Pensioners could have prevailed.

- Posted by Lawrence D. Loeb Your comment is awaiting moderation.

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Aiden said...

Most of the BK case valuations I have seen use very conservative liquidation values for most assets, that is not to say that the valuation in Chrysler and GM are probably too low, they probably are. Although, I can see that an auction of Property, Plant, and Equipment in Michigan or Ohio would probably yield very little for the bankruptcy estate considering the amount of manufacturing equipment and property already available there.

As for the GM revolver that I talked about yesterday, the Alix Partners (another conflicted valuation) puts the "adjusted book value" of the collateral at about the revolver amount, so I would think that the recovery would be from 70-100 cents on the dollar. The term loan recoveries are much more subjective given the market for manufacturing equipment, so in a worse case scenario, it's hard to say how much it would be worth. You may very well be right about the collateral backing those loans being worth close to the 6 billion, I just can't see the collateral being worth a large amount more than that after the bankruptcy and liquidation expenses.

Thanks for posting the Circuit City transcript. It's funny to hear Harvey Miller talking about secured lenders taking over in bankruptcies now that he is representing GM.

Lawrence D. Loeb said...


Thank you for your comment.

Under Section 506(a)(1) "An allowed claim of a creditor secured by a lien on property in which the estate has an interest, or that is subject to setoff under section 553 of this title, is a secured claim to the extent of the value of such creditor’s interest in the estate’s interest in such property, or to the extent of the amount subject to setoff, as the case may be, and is an unsecured claim to the extent that the value of such creditor’s interest or the amount so subject to setoff is less than the amount of such allowed claim. Such value shall be determined in light of the purpose of the valuation and of the proposed disposition or use of such property, and in conjunction with any hearing on such disposition or use or on a plan affecting such creditor’s interest.

Justice Ginsburg, on behalf of an 8-1 majority, wrote an opinion in Associates Commercial v. Rash clarified that the value of assets relating to a secured claim, under Section 505(a)(1), should be based on how that asset will be used. So the proper approach, for both Chrysler and GM, is the value of the assets on a going concern basis, not a liquidation basis.