Scott Sperling, head of private-equity firm THL, puts a new spin on the administration’s handling of the Chrysler situation. Specifically, he says everyone got what they deserved, and no creditor rights were violated.
Is this true? Cliff Asness would presumably beg to differ.
The crux of Scott’s argument is below. We confess to not being experts in Chrysler’s capital structure, and we don’t know what rights the unions would have been entitled to in a normal bankruptcy. So have at it:
[T]he Obama administration has been strongly criticised for not adequately respecting the rights of creditors. That charge is false. Not a single creditor right has been altered during this process.
The banks had the same choice they always face in similar situations: accept a modification in their loans or take over the struggling companies. A substantial majority of the banks initially accepted the government’s offer as fair. They recognised that Chrysler could not survive without enormous additional funding and realised that the value they would receive in liquidation would likely be less than what the government offered. They understood that the billions of dollars Chrysler desperately needed wouldn’t materialise without a dramatic restructuring.
The plan demands that Chrysler’s current and future retirees take equity in lieu of guaranteed benefits. Fiat must agree to take only stock in payment for billions of dollars worth of needed technology. And the unions must accept lower wages alongside significant plant closures and job losses. These policies inflict pain across the board. Unfortunately, this situation requires it.
Interestingly, only the debtholders are being given the opportunity to take significant cash out of Chrysler. For all the other stakeholders, any return depends upon the difficult work and investment necessary for long-term success. This is hard, but this is capitalism.
Our understanding was that the “hedge funds” that Obama blasted were upset because they were being treated as junior to not only the union but to the banks. Was this not the case?
In any event: Scott’s real purpose here is presumably to pave the way to GM’s creditors to be treated the same way. Scott’s whole argument is here >