The U.S. government’s restructuring plan for Chrysler LLC is sounding alarm bells for those in the business of lending money who worry that the plan could subvert decades of standing legal precedent and investing principles.
Banks, hedge funds and other investors that hold $6.9 billion in secured loans are being asked to release their contractual claims over Chrysler’s assets in exchange for a fraction of what they are owed. Many lenders see that as a raw deal, because in the bankruptcy code’s priority scheme, secured creditors are supposed to get paid before unsecured creditors such as employees.
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From The BBC
“They [Chrysler] say they are going to allocate out and distribute the proceeds of the sale in a way that they couldn’t do if they were going to do it under a Chapter 11 plan,” said Tom Lauria, a bankruptcy attorney at White & Case, representing a group of secured lenders.
Mr Lauria has said that Chrysler’s proposed plan “inverts” the usual priority scheme, whereby senior secured creditors are paid in full first, followed by junior lenders, administrative claims, unsecured lenders and equity holders.
Creditors object to the way the restructuring benefits the United Auto Workers union, which is an unsecured creditor, for the $10.6bn Chrysler owes to its retiree healthcare fund.
“What’s happening is the senior secured creditors are going to get 29 cents on the dollar and the unsecured creditors are going to get $10bn,” said Mr Lauria.
The lenders said in a statement on Thursday that they had been “systematically precluded” from negotiations with the government.
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