Tuesday, May 5, 2009

Chrysler Dissidents Must Reveal Identity, Judge Says

Chrysler LLC dissident lenders must reveal their identities by 10:00 a.m. tomorrow, a bankruptcy judge ruled, rejecting claims that their safety was at risk.

U.S. Bankruptcy Judge Arthur Gonzalez in New York forced the group to file a list of its members publicly, denying their request to reveal their identities only to the bankruptcy court. Gonzalez said the lenders have no evidence that keeping their identities private would help protect them. The group seeks to block an auction of most company assets to an entity managed by Fiat SpA, an outcome Chrysler said would force it to liquidate, costing thousands of jobs.

“There’s no evidence that authorities found the threats bona-fide,” Gonzalez said, questioning whether the group was trading in and out of Chrysler’s debt. He was told the group is a mix of original debt holders and parties who bought the debt at different prices.

Hedge funds have been denied bids to keep their identities confidential in other cases, amid concerns about whether short- term trading interests or credit default swaps give them conflicts of interest in bankruptcy proceedings. Gonzalez compared his ruling to a 2007 decision from U.S. Bankruptcy Court Judge Allan Gropper, who forced a group of hedge funds that invested in Northwest Airlines Corp. to fully disclose the size of its members’ stakes in the carrier.


Thomas Lauria, a lawyer for the dissidents, told Gonzalez today that the group has been exposed to “undue reputational damage, and threats of violence.” He said criticism of the group was exceptional, because it came from U.S. President Barack Obama.

Gonzalez said criticism is inherent in any bankruptcy, and Obama shouldn’t be singled out as an exceptional party given the government’s involvement with Chrysler.

Robert W. Hamilton, a lawyer for Chrysler, said that the threats couldn’t be taken seriously, as they were postings on an Internet message board affiliated with the Washington Post.

“The only evidence they have provided is a series of four or five anonymous rants on a Washington Post Web site,” Hamilton said. “Anyone with a passing familiarity with the hyperbolic rants on such boards on the Internet would not take such comments seriously.”

For example, an anonymous commenter who signed himself “jerkhoff” wrote, “These aristocrats should be lined up against the wall and executed.”

Credit Default Swaps

Hamilton also questioned whether the group may have had an incentive to force Chrysler into bankruptcy because it owns credit default swaps, which insure them against a default on Chrysler’s debt.

“What if the facts are that in order to recover on those CDS, they forced it into bankruptcy to recover 100 percent, or even more, of their investment,” Hamilton said.

Lauria told Gonzalez that the group doesn’t currently hold any CDS. Any CDS or derivatives the group holds would be disclosed tomorrow along with the groups’ identities.

The dissident lenders own only about $300 million of a total $6.9 billion in secured debt, they said in a bankruptcy court filing today.

A lawyer representing JPMorgan Chase & Co., the largest lender on the loan, and other lenders in favor of the deal, said last week the dissidents held about 10 percent of its value, less than $700 million.

Identified Lenders

In the filing, the lenders told the judge in charge of Chrysler’s bankruptcy that the carmaker’s plan to auction its best assets later this month was unfair because it prevents creditors from using claims like a loan to make a non-cash bid.

“The proposed sale is not an arms’ length bargain but rather is tainted by government domination and control,” the group said in the filing in U.S. Bankruptcy Court in New York.

The group refused last week to share in a $2.25 billion buyout for a $6.9 billion Chrysler loan that the U.S. government wanted off the books to keep the carmaker out of bankruptcy. Obama criticized them for speculating at taxpayers’ expense and said their opposition tipped Auburn Hills, Michigan-based Chrysler into bankruptcy.

Those named publicly include OppenheimerFunds Inc., Perella Weinberg Capital Management LP’s Xerion hedge fund and Stairway Capital Advisors. Perella withdrew its sale objection last week.

The lenders claim in their court filings that the U.S. government is subverting federal bankruptcy law by forcing lenders to agree to a reorganization that repays unsecured creditors ahead of some secured creditors.

The group, calling itself Chrysler’s non-TARP lenders, in reference to aid other creditors got from the federal Troubled Assets Relief Program, said the proposed auction would prevent a so-called “credit bid” from its members.

Credit Bid

Under a credit bid, parties use debt to buy a company. The group also seeks to block the proposed sale to an alliance led by Fiat, as well as a request by the U.S. automaker for approval of a $4.5 billion Treasury loan to finance the reorganization.

In a footnote, they cited a requirement that any competing bid include 10 percent of the purchase price in cash. That “appears designed specifically,” to prevent non-TARP members from making a credit bid, using the full amount of their secured claim, they said.

The group also objected to rules that would require all competing bids be subject to the same terms as the proposed transaction with the government and Fiat, which are financing the reorganization and providing small-car technology, respectively.

Because bids need to be made in a week under the proposed timeline, there isn’t enough time for parties to make due diligence required for a competing bid, the holdouts said.

Secured Lenders

The group has pitted itself against secured lenders that agreed to the Fiat deal, including JPMorgan, Citigroup Inc., Morgan Stanley and Goldman Sachs Group Inc., saying those institutions had conflicts of interest because they had accepted TARP funds, which included some government controls.

The four largest banks hold $4.83 billion of the debt, or about 70 percent.

In a related move, a group of Chrysler LLC unsecured creditors formed an 11-member committee today at a meeting in a midtown Manhattan hotel that will include the United Automobile Workers union, trade groups, car dealers and lawsuit plaintiffs. That group hired Kramer Levin Naftalis & Frankel LLP on New York as its law firm.

U.S. Trustee Diana Adams, who represents the Justice Department in the Chrysler bankruptcy case filed last week in Manhattan federal court, appointed the committee members at a meeting today. The automaker is seeking court approval of a sale that would create an alliance with Fiat, forming the world’s sixth-largest carmaker.

Major Shareholders

“All of the major shareholders are supportive of this transaction,” Chrysler spokesman Fredric Spar said outside the meeting, without referring specifically to the new committee.

The new company created by the auction asset sale would be owned by the United Auto Workers, Fiat, the U.S. Treasury and the Canadian government, Chrysler has said. Fiat’s 20 percent stake could be increased to 35 percent if the company meets certain milestones, the company has said.

The case is In re. Chrysler LLC, 09-50002, U.S. Bankruptcy Court, Southern District of New York (Manhattan)