Monday, June 22, 2009

Some Final Thoughts on Chrysler

Over the last two to three months, I have written extensively about the Chrysler bankruptcy. Now that the operating company has been purchased by Chrysler Group, LLC, I would like to summarize my thoughts about the case, and clear up any misconceptions that I may have created through my comments.

I may have given the wrong impression about some of the parties to this matter, and let me first clear those up:

Capstone / Robert Manzo

I believe that Robert Manzo and his colleagues at Capstone performed professionally and prepared a report that clearly set out their methodology and included appropriate caveats. They noted in their report that they were preparing a valuation based upon an orderly liquidation of Chrysler’s assets. They provided qualifications in their “Basis of Presentation,” including:

5. This analysis is hypothetical and subject to material variations which may arise during the course of the sale or liquidation of the 31 assembly and manufacturing plants. In an industry suffering from severe volume contraction, shifting consumer demands, tightening consumer finance and liquidity constraints, coupled with other large automobile manufacture[s] potentially disposing of similar assets simultaneously with the liquidation of Chrysler, actual recovery values may be significantly lower than the hypothetical values estimated herein.

and “General Assumptions” including:

4. This would be the first liquidation of a domestic OEM [Original Equipment Manufacturer] and there are likely significant risks that have not yet been identified or quantified. Additionally, the current state of the automotive market is unique and there is no historical reference to look to in assigning hypothetical liquidation values.


9. Proceeds from asset sales are assumed to be depressed due to:

  1. Limited potential buyers – domestic OEMs have limited resources and potential foreign buyers (TATA) have no dealer network in place.

  2. The industry is plagued with overcapacity – the need for additional capacity doesn’t exist.

  3. Re-launch could take 12 – 24 months – lost market share would likely require significant marketing and advertising expenditures to re-invigorate the brands.

In addition, the assumptions used to value each individual asset were clearly stated in the report. The documentation, thus, was clear and well presented.

In my comments on this blog, and elsewhere, I voiced my opinion that the findings reported by Robert Manzo and Capstone might well understate the actual values. I tried to make clear, in my comments, that it was difficult to come to any alternative conclusion from the available information. My belief is, and was, that certain of the stated assumptions in Capstone’s report may not stand up to scrutiny from another expert.

I cannot state, with any degree of certainty, that the valuation would not have withstood challenge.

As Judge Gonzalez noted in his opinion, the valuation prepared by Capstone was not challenged and, therefore, informed his judgment on the fairness of the compensation being proposed in the 363(b) transaction.

Robert Manzo, and his colleagues at Capstone, provided an analysis as requested by their client and they served their client well.


Greenhill provided a fairness opinion to Chrysler for the transaction that was included in the report. I pointed out that they specifically noted that they did not conduct any valuation work in connection with their engagement and that they specifically relied on the Capstone report in coming to their conclusions.

My comments in this regard were highlighting my belief that the investment bankers were not entirely comfortable opining on the liquidation value of Chrysler. They specified that their logic was that, given that the alternative was liquidation and that the proposed compensation was within the range of the potential liquidation values, the proposed transaction was fair.

You can argue with the legal interpretation used in coming to the conclusion (it would appear to be inconsistent with the findings in Associates Commercial v. Rash), but Greenhill is not a law firm.

From an investment banking point of view, their explanation and logic make perfect sense.

Judge Gonzalez

While I disagree with the Judge’s finding, the logic he used to arrive at his opinion makes sense. He relied on uncontested arguments from the debtor on valuation and, apparently, on the matter of who is paying the UAW VEBA.

Perhaps the Judge might have run his court differently under different circumstances, questioning matters from the bench. I do not believe that such actions are expected or required of a bankruptcy judge.

As I've noted, my disagreement stems from the valuation (which was uncontested) and the finding that NewChrysler was paying the $10.337 billion to the VEBA (apparently not contested).

Indiana Pensioners / Indiana Treasurer of State, Richard E. Mourdock

After the Non-TARP lenders withdrew their involvement in the case, the Indiana Pensioners were at a great disadvantage. Not only were they a tiny minority within the group of secured lenders (the others having accepted the proposed transaction), but they could not be expected to bear the significant costs of objecting by themselves (according to some sources, just the cost of retaining White & Case as legal counsel cost $2.0 million, and they had only invested $17 million to purchase their position!).

Without the budget to also retain a financial expert to contest Capstone’s findings; and given the limited time that they had (they did not retain White & Case until May 19th), they were limited to making legal arguments.

The argument, used in bankruptcy court, to oppose the valuation was based on trying to convince Judge Gonzalez that Robert Manzo, and Capstone, were biased by the compensation included in their retention agreement that provided for a $17 million bonus when the deal was completed. Judge Gonzalez, reasonably in my view, rejected this argument since the motion to retain Capstone (Docket 174) was uncontested.

Unfortunately for the Indiana Pensioners, legal arguments alone were not sufficient to derail the momentum of the 363(b) sale.

The President’s speech, demonizing hedge funds and other investors for opposing the sale was the catalyst for my writing about this case.

I am greatly troubled by how the Executive Branch used populism to bully secured lenders into giving up their contractual rights.

If this ends up being, as many have stated, an isolated and unusual case that will not be repeated; then there should be no long term impact from this behavior. If, however, this situation recurs, there will be a clear need for financial market participants (banks, institutional investors, etc.) to increase the cost of lending and limit the availability of credit (shutting off credit to other potential beneficiaries of Executive interference, such as companies with union work forces).

I wish the new company the best of luck and hope that it prospers, and I hope that this is not a prelude to more government interference in business.

It is one thing for the Government to step into the breach as a last source of funding for, what many believe is, a critical participant in the economy. It is another to attempt to force an outcome inconsistent with the rule of law (which I believe happened in this case).

The rule of law is the basis for the success of capitalism. Any behavior by the Government that attempts to override the law could have a catastrophic long term impact on the markets and the economy.

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