First the federal government's auto bailout bullies came for Chrysler's secured, first-lien creditors, and defeated them.
Then they came for General Motors' unsecured bondholders. The feds appear to be in the drivers' seat in shafting them disproportionately to force a better deal for the United Auto Workers' healthcare trust.
Now, in a matter that at first only seemed to interest the Wall Street Journal, they've also come after Delphi's debtor-in-possession (DIP) financing providers as GM attempts to scoop up what it wants from the bankrupt auto-parts supplier. But this time, at least for now, a bankruptcy judge with a richly appropriate name has stopped them:
Judge Orders Auction in a Rebuke to Delphi Plan
A U.S. bankruptcy court Wednesday sided with a group of Delphi Corp. lenders who said a government-led plan to sell the auto-parts maker's operations to a private-equity fund trampled on their rights.
Judge Robert Drain ordered Delphi to hold an auction and allow bids to challenge the government-brokered sale to Platinum Equity. "What's so special about Platinum?" asked Judge Drain.
....The ruling is a victory for a group of hedge funds who stand to (lose) 80% or more of their roughly $2.5 billion in debtor-in-possession, or DIP, financing. The decision came on the same day that Chrysler LLC and Fiat closed their government-brokered tie-up over the objections of Chrysler creditors who argued they were treated unfairly by the Obama administration.
The Delphi case is the latest in an escalating debate over the Obama administration's attitude toward creditors' rights in bankruptcy court. ....
"The rule of law and commercial rights of lenders cannot bend in the face of political forces," said Marc Abrams, a lawyer for a group of the hedge funds, in a standing-room-only courtroom in lower Manhattan Wednesday before Judge Robert Drain.
.... The (government's) plan calls for some DIP lenders, including the most senior creditors owed about $2.5 billion, to receive 20 cents on the dollar for their loans. These lenders argue that Delphi's plan overstates the amount they would receive. A Delphi reorganization plan that collapsed in April 2008 called for DIP lenders to receive full payment.
"A DIP loan should be money good," said Mr. Abrams, whose clients include Silver Point Finance LLC and Monarch Alternative Capital. "It's the T-bill of a bankruptcy claim."
Megan McCardle at the Atlantic's Asymmetrical Information blog explains the significance of DIP financing:
.... this is an even more heavy-handed intervention than Chrysler, and considerably more disturbing. Debtor-in-Possession financing, or DIP, is the financing that allows companies to reorganize in bankruptcy. It's senior to everything else because if it weren't, no one would be willing to lend money to companies that definitionally have a high probability of failure. Stiffing those creditors in order to make GM, or even Delphi, better off, is incredibly short-sighted.
It also has some potentially scary implications for our political economy. The quasi-legitimate argument in favor of the government's interventions in favor of the UAW was that Uncle Sam was the only available debtor-in-possession financier, and therefore had a right to call the tune. Screwing over the DIP providers would, of course, make it harder for other companies to get DIP. What new rights could the government discover in those bankruptcies?
In this case, however, the bankruptcy judge wasn't buying. He ordered Delphi to put its assets up for auction. Now we get to test the theory that the government is acting in ways that actually make all the creditors getting cramdowns better off. If the government has indeed been acting in everyone's best interest, the auction will be a dismal failure.
Given that the New York Post has reported that Carl Icahn's Federal-Mogul Corporation appears to be interested in bidding for Delphi, we may already see the judge's decision vindicated financially.
My only quibble with Ms. McCardle is that the result shouldn't be the driver here in any event. Trampling on secured lenders rights, as the government successfully did at Chrysler, has no legal basis, and should never have been allowed to stand. Running roughshod over the proportional rights of unsecured lenders has no legal basis and shouldn't be allowed at GM; it may yet be turned back. DIP financing provider's rights must remain superior, even if the government's plan is better, because that's what the law says (the same goes for governments' supposedly superior plans in eminent domain situations that go beyond the Fifth Amendment specific permissions; it's irrelevant that they're superior -- even though they often aren't). Don't like the law? Pass a new one the old-fashioned way -- through Congress.
Most of the establishment media's laziness in covering these important matters during the auto bailout bankruptcies has bordered on disgraceful, and has been anything but informative.
Cross-posted at BizzyBlog.com.
