In January of last year I predicted (see Notable Bankruptcies of 2009: Q1) that “major” corporate bankruptcies in 2009 would challenge the 383 mark set in 2001 (the high-water mark after the dotcom bubble). I even suggested that it was possible that we could exceed 400 “major” corporate bankruptcies in 2009.

It looked good for awhile, …but what a difference a year makes!!

Although corporate bankruptcies in 2009 were the greatest since 2002, we finished well shy of my predicted mark, and the pace of corporate bankruptcies, in fact, decreased as the year progressed. According to Bankruptcydata.com, “major” filings reached 249 in 2009, more than 100 bankruptcies shy of my prediction.

As I mentioned in a previous post (see Notable Bankruptcies of 2009: Q3), the stylized fact that the pace of corporate bankruptcies decreased through Q2, Q3, and Q4 begs the question of whether the underlying cause was a structurally improved economy or the massive Fed/Treasury liquidity programs keeping weaker firms on artificial life support. My sense is that it had more to do with the latter than the former, but we will find out for certain once the Fed/Treasury start to unwind their extraordinary liquidity programs.

With that in mind, it is my expectation that corporate bankruptcy filings will increase in 2010, for a couple of reasons. First, bankruptcies are a lagging economic indicator. As with employment, bankruptcies typically peak well after the economic trough. As an example, although the dotcom bubble burst in March of 2000, bankruptcies did not peak until 2001, and were elevated into 2002. Second, if fundamentally weak companies are being propped up by the provision of credit/liquidity to an economy that cannot structurally support them, it is only a matter of time before bankruptcies begin to reflect the true underlying economic fundamentals.

So my baseline (over/under) call for 2010 stands at 300 corporate bankruptcies.

Anyhow, below you can find an updated list of what I see as the “noteworthy” corporate bankruptcies of 2009 (as reported by Bankrupctydata.com). New additions since October appear in RED (please note that this is not an exhaustive list):

• 1st Centennial Bancorp (Banking)
• AbitibiBowater Inc. (Paper)
• Accuride Corporation (Trucking)
• Adamar Inc. dba Tropicana Casino & Resort (Gambling)
• Advanta Corp. (Banking/Finance)
• Altus Pharmaceuticals (Pharma)
  
• American Community Newspapers Inc. & LLC (Newspapers)
• ARG Enterprises, Inc. (Restaurants)
• Aurora Oil & Gas Corporation (Energy)
• Aventine Renewable Energy Holdings, Inc. (Energy)
• BankUnited Financial Corporation (Banking)
• Barzel Industries, Inc. (Manufacturing)
• Baseline Oil & Gas Corp. (Energy)
• Bearingpoint, Inc. (Consulting)
• BI-LO, LLC (Supermarkets)
• Bruno’s Supermarkets, LLC (Supermarkets)
• Butler International, Inc. (IT Services)
• California Coastal Communities, Inc. (Real Estate)
• Cape Fear Bank Corporation (Banking)
• Capital Corp of the West (Banking)
• Capmark Financial (Banking)
• CCS Medical, Inc. (Medical)
• Champion Enterprises, Inc. (Real Estate)
• Charter Communications, Inc. (Telecom)
• Chemtura Corporation (Chemicals)
• Chrysler LLC (Automobiles)
• CIB Marine Bancshares, Inc. (Banking)
• CIT Group (Banking)
• Citadel Broadcasting (Media)
  
• Colonial BancGroup, Inc. (Banking)
• Cooperative Bankshares, Inc. (Banking)
• Cooper-Standard Holdings (Automobile)
• Crescent Resources, LLC (Real Estate)
• Cynergy Data, LLC (Banking)
• deCODE Genetics, Inc. (Biotech)
• Eddie Bauer Holdings, Inc. (Retail)
• Edge Petroleum Corporation (Oil & Gas)
• Ennis Homes, Inc. (Real Estate)
• Extended Stay Inc. (Hotels)
• Fairpoint Communications (Telecom)
• Filene’s Basement, Inc. (Retail)
• Finlay Enterprises, Inc. (Jewerly)
• Fleetwood Enterprises, Inc. (Recreational Vehicles)
• Fortunoff Holdings, LLC (Retail)
• Fountainbleu Las Vegas, LLC, (Hotels)
• Freedom Communications Holdings, Inc. (Media)
• Fulton Homes Corporation (Real Estate)
• General Growth Properties, Inc. (Real Estate)
• General Motors Corporation (Automobiles)
• G.I. Joe’s, Inc. (Retail)
• Goody’s LLC (Retail)
• Gottschalks Inc. (Retail)
• GSI Group, Inc. (Semiconductors)
• Guaranty Financial Group Inc. (Banking)
• Herbst Gaming, Inc. (Gambling)
• Holley Performance Products, Inc. (Automotive)
• ION Media Networks, Inc. (Television)
• Idearc (Publishing)
• Imperial Capital Bancorp (Banking)
• Irwin Financial Corporation (Banking)
• JL French Automotive Castings, Inc. (Automotive)
• Journal Register Companies (Newspapers)
• Lazy Days RV Center, Inc. (Recreational Vehicles)
• Lear Corporation (Automobile)
• Lyondell Chemical Company (Chemicals)
• MagnaChip Semiconductor LLC (Semiconductors)
• Magna Entertainment (Gambling)
• Majestic Star Casino, LLC (Gambling)
• Masonite Corporation (Real Estate Manufacturing)
• Metromedia International Group, Inc. (Media)
• Midway Games, Inc. (Entertainment Software)
• Monaco Coach Corporation (Recreational Vehicles)
• Muzak Holdings LLC (Entertainment)
• Nortel Networks, Inc. (Telecom)
• NTK Holdings – Nortek, Inc. (Construction)
• NutraCea (Health/Nutrition)
  
• Oscient Pharmaceuticals Corporation (Pharma)
• Pacific Energy (Oil & Gas)
• Penn Traffic Company (Supermarkets)
• Philadelphia Newspapers, LLC (Newspapers)
• Proliance International, Inc. (Manufacturing)
• RathGibson, Inc. (Manufacturing)
• Reader’s Digest, Inc. (Media)
• Recycled Paper Greetings, Inc. (Greeting Cards)
• R.H. Donnelley Corporation (Marketing)
• Ritz Camera Centers, Inc. (Retail)
• Samsonite Company Stores, LLC (Retail)
• Security Bank Corporation (Banking)
• Shane Company (Jewelry)
• Silicon Graphics, Inc. (IT/Computing)
• Silver State Bancorp (Banking)
• Simmons Company (Bedding)
• Six Flags, Inc. (Entertainment)
• Smurfit-Stone Container Corporation (Paper Manufacturing)
• Source Interlink Companies, Inc. (Marketing)
• Southern Community Bancshares, Inc. (Banking)
• Spectrum Brands (Consumer Products)
• Star Tribune Companies (Newspapers)
• Station Casinos, Inc. (Gambling)
• Sun-Times Media Group, Inc. (Newspapers)
• Tarragon Corporation (Real Estate)
• Team Financial, Inc. (Banking)
• Temecula Valley Bancorp (Banking)
• Teton Energy Corporation (Oil & Gas)
  
• Thornburg Mortgage, Inc. (Banking)
• TLC Vision Corporation (Vision/Eye Care)
• Trump Entertainment (Gambling)
• UCBH Holdings (Banking)
• U.S. Shipping Partners L.P. (Marine Transportation)
• Velocity Express Corporation (Delivery)
• Vineyard National Bancorp (Banking)
• Visteon Corporation (Auto Supplies)
• Walking Company Holdings, Inc. (Footwear)
• Wall Homes, Inc. (Real Estate)
• WL Homes, LLC (Real Estate)
• Young Broadcasting, Inc. (Television)

In addition to “major” corporate bankruptcies (e.g., those firms with assets greater than $50M) tracked by Bankruptcydata, the U.S. government tracks all bankruptcy filings by type (e.g., Chapter 7, Chapter 11, Chapter 13). You can find detailed bankruptcy statistics at the U.S. Courts website. I will update the charts that I presented earlier in the year when the final 2009 numbers are released, which should be sometime in March (see Notable Bankruptcies of 2009: Q1).

In January I predicted (see Notable Bankruptcies of 2009: Q1) that “major” bankruptcies in 2009 would challenge the 383 mark set in 2001 (the high-water mark after the dotcom bubble). I even suggested that it was possible that we could exceed 400 “major” bankruptcies in 2009.

According to Bankruptcydata.com, there have been 208 “major” filings thus far in 2009. Assuming that bankruptcies are equally distributed throughout the year, this puts us on pace for 277 bankruptcies. That is tracking well shy of my prediction. In fact, bankruptcies were down significantly from Q2 to Q3, and have been trending downward throughout the year.

That stylized fact begs the question: Is that a “green shoot” dip in bankruptcy filings, or might the Fed/Treasury liquidity programs be keeping weaker firms on artificial life support?

Although I cannot be sure why bankruptcies have tracked lower than forecast — whether due to a better-than-expected economy or government intervention (or some combination of the two) — I am certain that my prediction was way off. At this point then, if the bankruptcy pace quickens in the 4th quarter (as is typical), the final number will likely come in around 300. With 300 major bankruptcies, we would exceed last year’s number by 30% (see Notable Bankruptcies of 2008: Final Tally).

But looking forward, the question now becomes: What should we expect for 2010? I will wait for the final 2009 numbers to make a definitive prediction, but right now, my informed guess would be 350, …and that’s even if the economy rebounds in 2010, barring a double-dip recession scenario.

Anyhow, below you can find an updated list of what I see as the “noteworthy” bankruptcies of 2009, as reported by Bankrupctydata.com. New additions since January appear in RED (please note that this is not an exhaustive list):

• 1st Centennial Bancorp (Banking)
  
• AbitibiBowater Inc. (Paper)
• Adamar Inc. dba Tropicana Casino & Resort (Gambling)
• American Community Newspapers Inc. & LLC (Newspapers)
• ARG Enterprises, Inc. (Restaurants)
• Aurora Oil & Gas Corporation (Energy)
  
• Aventine Renewable Energy Holdings, Inc. (Energy)
  
• BankUnited Financial Corporation (Banking)
• Barzel Industries, Inc. (Manufacturing)
• Baseline Oil & Gas Corp. (Energy)
  
• Bearingpoint, Inc. (Consulting)
• BI-LO, LLC (Supermarkets)
• Bruno’s Supermarkets, LLC (Supermarkets)
• Butler International, Inc. (IT Services)
• Cape Fear Bank Corporation (Banking)
• Capital Corp of the West (Banking)
• CCS Medical, Inc. (Medical)
  
• Charter Communications, Inc. (Telecom)
• Chemtura Corporation (Chemicals)
• Chrysler LLC (Automobiles)
• CIB Marine Bancshares, Inc. (Banking)
  
• Colonial BancGroup, Inc. (Banking)
• Cooperative Bankshares, Inc. (Banking)
  
• Cooper-Standard Holdings (Automobile)
  
• Crescent Resources, LLC (Real Estate)
• Cynergy Data, LLC (Banking)
  
• Eddie Bauer Holdings, Inc. (Retail)
• Ennis Homes, Inc. (Real Estate)
• Extended Stay Inc. (Hotels)
• Filene’s Basement, Inc. (Retail)
• Finlay Enterprises, Inc. (Jewerly)
  
• Fleetwood Enterprises, Inc. (Recreational Vehicles)
• Fortunoff Holdings, LLC (Retail)
• Fountainbleu Las Vegas, LLC, (Hotels)
• Freedom Communications Holdings, Inc. (Media)
  
• Fulton Homes Corporation (Real Estate)
• General Growth Properties, Inc. (Real Estate)
• General Motors Corporation (Automobiles)
• G.I. Joe’s, Inc. (Retail)
• Goody’s LLC (Retail)
• Gottschalks Inc. (Retail)
• Guaranty Financial Group Inc. (Banking)
  
• Herbst Gaming, Inc. (Gambling)
• Holley Performance Products, Inc. (Automotive)
  
• ION Media Networks, Inc. (Television)
  
• Idearc (Publishing)
• Irwin Financial Corporation (Banking)
• JL French Automotive Castings, Inc. (Automotive)
  
• Journal Register Companies (Newspapers)
• Lear Corporation (Automobile)
  
• Lyondell Chemical Company (Chemicals)
• MagnaChip Semiconductor LLC (Semiconductors)
  
• Magna Entertainment (Gambling)
• Masonite Corporation (Real Estate Manufacturing)
• Metromedia International Group, Inc. (Media)
• Midway Games, Inc. (Entertainment Software)
• Monaco Coach Corporation (Recreational Vehicles)
• Muzak Holdings LLC (Entertainment)
• Nortel Networks, Inc. (Telecom)
• Oscient Pharmaceuticals Corporation (Pharma)
  
• Pacific Energy (Oil & Gas)
• Philadelphia Newspapers, LLC (Newspapers)
• Proliance International, Inc. (Manufacturing)
• RathGibson, Inc. (Manufacturing)
  
• Reader’s Digest, Inc. (Media)
  
• Recycled Paper Greetings, Inc. (Greeting Cards)
• R.H. Donnelley Corporation (Marketing)
  
• Ritz Camera Centers, Inc. (Retail)
• Samsonite Company Stores, LLC (Retail)
  
• Security Bank Corporation (Banking)
  
• Shane Company (Jewelry)
• Silicon Graphics, Inc. (IT/Computing)
• Silver State Bancorp (Banking)
• Six Flags, Inc. (Entertainment)
  
• Smurfit-Stone Container Corporation (Paper Manufacturing)
• Source Interlink Companies, Inc. (Marketing)
• Southern Community Bancshares, Inc. (Banking)
  
• Spectrum Brands (Consumer Products)
• Star Tribune Companies (Newspapers)
• Station Casinos, Inc. (Gambling)
  
• Sun-Times Media Group, Inc. (Newspapers)
• Tarragon Corporation (Real Estate)
• Team Financial, Inc. (Banking)
  
• Thornburg Mortgage, Inc. (Banking)
  
• Trump Entertainment (Gambling)
• U.S. Shipping Partners L.P. (Marine Transportation)
• Velocity Express Corporation (Delivery)
  
• Vineyard National Bancorp (Banking)
  
• Visteon Corporation (Auto Supplies)
• Wall Homes, Inc. (Real Estate)
• WL Homes, LLC (Real Estate)
• Young Broadcasting, Inc. (Television)

In January I predicted (see Notable Bankruptcies of 2009: Q1) that “major” bankruptcies in 2009 would challenge the 383 mark set in 2001 (the high-water mark after the dotcom bubble). I even suggested that it was possible that we could exceed 400 “major” bankruptcies in 2009.

According to Bankruptcydata.com, there have been 156 “major” filings thus far in 2009. Assuming that bankruptcies are equally distributed throughout the year, this puts us on pace for 312 bankruptcies. That is tracking well shy of my prediction. In fact, bankruptcies were down significantly from Q1 to Q2, as there were 90 bankruptcies in the first quarter but only 66 in the second.

That stylized fact begs the question: Is that a “green shoot” dip in bankruptcy filings, or is this simply a seasonal fluctuation?

Although I cannot be certain, the latter makes more sense for several reasons. First, bankruptcies are a lagging economic indicator. As with employment, bankruptcies typically peak well after the economic trough. For example, although the dotcom bubble burst in March of 2000, bankruptcies did not peak until 2001, and were elevated into 2002. So even if you believe that the economy has bottomed out (which is not entirely clear yet), we should still expect to see bankruptcies rise. Second, according to bankruptcy statistics from the U.S. Courts website, the pace of bankruptcy filings generally increases in the second half of the year.

For these reasons, I expect the filing pace to quicken as the year goes on, and I believe that we will ultimately challenge the 383 mark from 2001.

Below you can find an updated list of what I see as the “noteworthy” bankruptcies of 2009, as reported by Bankrupctydata.com. New additions since January appear in RED (please note that this is not an exhaustive list):

• 1st Centennial Bancorp (Banking)
  
• AbitibiBowater Inc. (Paper)
• Adamar Inc. dba Tropicana Casino & Resort (Gambling)
• American Community Newspapers Inc. & LLC (Newspapers)
• ARG Enterprises, Inc. (Restaurants)
• Aventine Renewable Energy Holdings, Inc. (Energy)
  
• BankUnited Financial Corporation (Banking)
  
• Bearingpoint, Inc. (Consulting)
• BI-LO, LLC (Supermarkets)
• Bruno’s Supermarkets, LLC (Supermarkets)
• Butler International, Inc. (IT Services)
• Cape Fear Bank Corporation (Banking)
• Capital Corp of the West (Banking)
  
• Charter Communications, Inc. (Telecom)
• Chemtura Corporation (Chemicals)
• Chrysler LLC (Automobiles)
• Crescent Resources, LLC (Real Estate)
• Eddie Bauer Holdings, Inc. (Retail)
• Ennis Homes, Inc. (Real Estate)
• Extended Stay Inc. (Hotels)
• Filene’s Basement, Inc. (Retail)
  
• Fleetwood Enterprises, Inc. (Recreational Vehicles)
• Fortunoff Holdings, LLC (Retail)
• Fountainbleu Las Vegas, LLC, (Hotels)
• Fulton Homes Corporation (Real Estate)
• General Growth Properties, Inc. (Real Estate)
• General Motors Corporation (Automobiles)
• G.I. Joe’s, Inc. (Retail)
• Goody’s LLC (Retail)
• Gottschalks Inc. (Retail)
• Herbst Gaming, Inc. (Gambling)
• ION Media Networks, Inc. (Television)
  
• Idearc (Publishing)
• Journal Register Companies (Newspapers)
• Lyondell Chemical Company (Chemicals)
• MagnaChip Semiconductor LLC (Semiconductors)
  
• Magna Entertainment (Gambling)
• Masonite Corporation (Real Estate Manufacturing)
• Metromedia International Group, Inc. (Media)
• Midway Games, Inc. (Entertainment Software)
• Monaco Coach Corporation (Recreational Vehicles)
• Muzak Holdings LLC (Entertainment)
• Nortel Networks, Inc. (Telecom)
• Pacific Energy (Oil & Gas)
• Philadelphia Newspapers, LLC (Newspapers)
• Recycled Paper Greetings, Inc. (Greeting Cards)
• R.H. Donnelley Corporation (Marketing)
  
• Ritz Camera Centers, Inc. (Retail)
• Shane Company (Jewelry)
• Silicon Graphics, Inc. (IT/Computing)
• Silver State Bancorp (Banking)
• Six Flags, Inc. (Entertainment)
  
• Smurfit-Stone Container Corporation (Paper Manufacturing)
• Source Interlink Companies, Inc. (Marketing)
  
• Spectrum Brands (Consumer Products)
• Star Tribune Companies (Newspapers)
• Sun-Times Media Group, Inc. (Newspapers)
• Tarragon Corporation (Real Estate)
• Team Financial, Inc. (Banking)
  
• Thornburg Mortgage, Inc. (Banking)
  
• Trump Entertainment (Gambling)
• U.S. Shipping Partners L.P. (Marine Transportation)
  
• Visteon Corporation (Auto Supplies)
• Wall Homes, Inc. (Real Estate)
• WL Homes, LLC (Real Estate)
• Young Broadcasting, Inc. (Television)

The Supreme Court delayed Chrysler’s reemergence from bankruptcy yesterday by issuing a stay (see Court Adds Uncertainty to Chrysler Reorganization). According to the Associated Press:

Chrysler’s five weeks of breakneck-speed bankruptcy proceedings came to a screeching — but possibly temporary — halt Monday, when a Supreme Court justice delayed its sale of assets to Italy’s Fiat.

The move could derail the government’s ambitious plan for the U.S. automaker to blaze a path to profitability without the burden of many of its debts.

Justice Ruth Bader Ginsburg issued a stay…

This is a story that I have been following for some time (see Legal Issues Affecting Chrysler, Anything but Surgical or Lessons for GM for background). Back then I discussed the group of Non-TARP lenders who were opposed to the deal. Their claim was that the sale to Fiat neither respected their rights as senior creditors nor made them whole. Unfortunately, their opposition quickly faded, as it became clear to them that they were not only swimming upstream, but that the cost of opposition was more than they were willing to tolerate.

Although the group of dissident lenders disbanded, a group of Indiana pension and construction funds continued the fight. As explained by the AP:

…the Indiana funds, represented by the same law firm as the dissident debtholders, filed their own objection and eventually appealed to the 2nd U.S. Circuit Court of Appeals and the Supreme Court. They claim the sale unfairly favors Chrysler’s unsecured stakeholders such as the union ahead of secured debtholders like themselves.

The funds also are challenging the constitutionality of the Treasury Department’s use of money from the Troubled Asset Relief Program to supply Chrysler’s bankruptcy protection financing. They say the government did so without congressional authority.

The funds hold about $42.5 million, or less than 1 percent, of Chrysler’s $6.9 billion in secured debt. They bought it in July 2008 for 43 cents on the dollar.

The Indiana funds are not likely to prevail. As was the case with the group of dissident lenders, the Indiana funds are in the minority among their own class of creditors (the total group of first lien holders including the likes of Citigroup and JP Morgan). They also hold less than 1% of the total debt.

That notwithstanding, they still do have a point, and are raising valid concerns. The issues they raise not only go to the root of creditor rights, but more importantly, raise fundamental questions about the rule of law. And to borrow from William J. Bernstein, “A law that does not apply equally to all citizens, the ruler included, is no law at all.”

So good for the Indiana pension and construction funds (and their legal representatives) who, despite the odds, fight not only for their own rights, but also for the rights of all citizens in a vibrant democracy.

************************************************************

UPDATE: 6/9/2009 at 9pm

Actually, yes so fast. Nearly 24 hours after Supreme Court Justice Ginsberg issued her stay, the Supreme Court vacated the stay effectively clearing the sale to Fiat (see Court Clears Chrysler Sale). According to the SCOTUS blog:

Justice Ginsburg set off a wave of speculation, some of it well wide of the mark, by issuing a brief order Monday afternoon temporarily staying the transaction.  Suggestions in several quarters that her delay might have meant that the Court was signaling that it might hear the challengers’ case and decide it proved to be entirely without foundation.

MY COMMENT: That’s a bummer. I still believe that the challengers (in particular, the Indiana funds) had a point, especially with respect to the issue of constitutionality. And, in fact, even in its statement, the Supreme Court recognized that:

a denial of a stay is not a decision on the merits of the underlying legal issues.

To summarize the SCOTUS post:

First, the three delay requests filed by three Indiana teacher, police and construction worker benefit plans (08A1096), by a variety of consumers groups (08A1099), and by Patricia Pascale, a widow suing for her husband’s asbestos-related death (08A1100), were denied, and Ginsburg’s temporary order was lifted.

Second, stressing that it was not ruling on the merits of these challenges, the Court listed the factors that govern whether a stay, or delay, would be granted.   Among those are whether four Justices would agree to hear the case on the merits, whether there was “a fair prospect” the Court would overturn the lower court ruling (here, a decision of a bankruptcy judge in New York), and whether “irreparable harm” would result if no stay were granted.  This paragraph added that, “in a close case,” the opposing rights and needs of each side would be balanced against each other.

Third, the Court stressed that no one had a right to a delay, since that was a matter of “judicial discretion.” It added that the party seeking the stay had the burden of justifying it, and concluded: “The applicants have not carried that burden.”

Finally, it stressed that the matter was one to be examined on the basis of a particular case, requiring “individualized judgments in each case.” It closed with this: “Our assessment of the stay factors here is based on the record and proceedings in this case alone.”

Although I thought that it was an absolute long shot that the high court would overturn the decision coming out of the lower court, I never expected a decision to come this quickly.

But there you have it. Hello Fiat-Chrysler.

No real news on GM today. The market largely anticipated the event, as it had been wholly telegraphed by the Obama administration (see Finally a Sensible Approach).

Moreover, as I stated on several occasions, if handled properly, there would be no reason to fear a GM bankruptcy (see Could GM Survive Bankruptcy?). Back then I concluded:

YES, GM could survive bankruptcy, and we needn’t be frightened by the prospects, …no matter how much GM tries to convince us that it would spell the apocalypse.

So here we are post bankruptcy, and as far as I can tell, the world has neither come to an end nor has the economy ground to a halt.

In a broader sense, the market’s lack of response to GM’s bankruptcy sends a signal that the economic future of the United States is no longer dependent on, or inextricably tied to, firms like GM. This is not to say that manufacturing is not important to the prosperity of the United States; rather, simply that the manufacturing future of the U.S. is not about the manufacture/assembly of automobiles. But that’s another story for a different day.

For now then, I’ll simply share GM’s official bankruptcy press release. It was sent to me from our new employees – the kind folks from the new GM, the firm in which you, me, and the rest of the American taxpayers will become majority shareholders. Click below to view the full release.

GM Bankruptcy Press Release

Now back to the fascinating part of the bankruptcy – the impending battle between GM bondholders and the U.S. Government. I would not be surprised to see this battle play out in much the same fashion as the battle between creditors and the U.S. Government in the Chrysler case (see Chrysler Bankruptcy: Anything but Surgical, Legal Issues Affecting Chrysler, and Lessons for GM for background). Nevertheless, as I suggested in my post Lessons for GM:

Although the debt restructuring problems they both face are the same in theory, in the case of Chrysler, it was much easier for the federal government to get Chrysler’s lenders to accept a haircut because the majority of its first lien debt sat with banks that accepted TARP money (e.g., Citigroup and JP Morgan). The government could therefore exert tremendous influence over these lenders.

Not so in the case of GM. GM’s bondholders are a much more diffuse bunch with disparate interests. Moreover, the government has much less of a direct influence over GM’s bondholders.

Although GM was able to reach an agreement, in principle, with many bondholders (see US Strikes Deal with Bondholders), it will be interesting to watch how those who remain opposed to the deal ultimately play their hand.

As we wait for GM to officially declare bankruptcy (see Bondholders Push GM to Brink) and a decision on Opel (Berlin Considers Buyer for GM Unit), I thought I’d share an interesting article from this week’s edition of the Economist on Fiat’s quest to create a global automobile firm (see Marriages Made in Hell).

According to the Economist:

The bold attempt by Sergio Marchionne, chief executive of the Fiat Group, to use the crisis that has overwhelmed Detroit to forge a three-way merger between Fiat Auto, Chrysler and General Motors’ European arm, Opel, has been greeted both with admiration (for his chutzpah) and scepticism (about his ability to pull it off). The sceptics say cross-border mergers in the car industry have a poor record and that Mr Marchionne is biting off much more than he can chew.

Assuming Mr Marchionne does get both [Chrysler and Opel] deals done, that is when the hard part will begin. Adam Jonas of Morgan Stanley says that although the three-way combination could make 6m cars and around $100 billion of revenue, he doubts whether it will be able to operate in a fully integrated way like VW or Toyota “for perhaps decades”. He also questions Mr Marchionne’s faith in scale, suggesting it is a function of success rather than prerequisite for it and gives warning that even successful mergers bring with them “many hidden cost burdens (financial and non-financial)” and that these can spiral if things do not go well.

The doubts are rooted in experience. With the partial exception of the alliance formed between Renault and Nissan a decade ago, auto-industry mergers usually go wrong and destroy rather than create value.

Personally, I think it is extremely generous to refer to the Renault and Nissan deal as a success. Let’s just say it hasn’t fallen apart, yet. But that is neither here nor there. The real point is that these types of deals generally fail.

The skepticism detailed in the Economist is entirely consistent with the views I expressed several weeks ago in the post Is Fiat Nuts??:

If it weren’t enough that Fiat is trying to expand on the North American front via its alliance with Chrysler (see Now Introducing Fiat/Chrysler), it now seems as if Fiat wants to simultaneously expand its empire closer to home (via an acquisition of Opel)…

Are they nuts??? It is hard enough to pull off one integration the size of Chrysler, but now they are going to try to pull off two? And to top it all off, we’re talking about foreign integrations, where economic, political, and cultural differences compound the complexity. Frankly, I am surprised that Fiat’s board would give Marchionne the approval to simultaneously attempt both deals. A prudent board would counsel Marchionne to eat one cookie at a time, lest he get indigestion. So much for corporate governance.

“From an engineering and industrial point of view, this is a marriage made in heaven,” [Marchionne] was quoted as telling the Financial Times on Monday.

Or [as I put it at the time] an integration made in hell.

The Economist continues:

The corporate troubleshooter [Marchionne], who, since 2004, has been responsible for a highly successful turnaround at Fiat, has reached the conclusion that volume carmakers will in future need to sell at least 5.5m vehicles a year to be viable. With just over 2m sales last year, Fiat is too small to get there on its own. The choice, he believes, is a stark one: Fiat must be either a nimble hunter or wait to be gobbled up by someone else.

I responded to that specious logic with the following:

I just don’t get it. Why the preoccupation with size? I remain unconvinced that largess is a means to success. Just ask Jurgen Schrempp and the folks at Daimler, who ran around spewing the same nonsense about scale and survival before their acquisition of Chrysler.

Size certainly leads to increased revenues, which helps justify exorbitant managerial pay. But given the organizational complexities that go hand in hand with size, size does not always translate into increased profitability.

In order to truly benefit from size, there must exist extremely large economies of scale and scope. Perhaps such economies (the ability to economize on platforms, dealerships, suppliers, etc.) exist in theory in the auto industry. However, the power of the auto unions, coupled with the structural characteristics of the countries in which Fiat, Chrysler, and Opel operate make capturing synergies very difficult.

Fiat will certainly encounter difficulties when trying to capture synergies based upon economies of scale. But the trouble with Marchionne’s logic does not end there.

The fact remains, there is absolutely nothing wrong (from a strategic perspective) with being the hunted instead of the hunter. Lest we forget, managers act in the capacity of agents for shareholders. As such, they have a fiduciary responsibility to maximize shareholder value. If maximizing shareholder value means selling to a high bidder, then so be it. Shareholders generally end up better off in cases where their firm is the target rather than the acquiror. Moreover, looking only to be the hunter can be self-serving on the part of managers – it helps enrich them, allowing them to build empires and become entrenched along the way, while ultimately destroying shareholder value.

If Marchionne is truly interested in acquiring Chrysler and Opel because he believes it is better to be the hunter than the hunted, then we must question his motivation. It could be, as I pointed out in my previous post (Is Fiat Nuts??), that:

Marchionne, aided by a board of directors that he has in his back pocket, is engaging in a form of empire building whereby his own personal interests in building the world’s second largest automaker are taking precedence over the best interests of Fiat’s long-term health and prosperity.

Nevertheless, for those of you interested, I encourage you to read the entire Economist piece. It provides a nice perspective on the proposed three-way deal. That said however, it still came across as if the authors believe that the Fiat/Chrysler/Opel deal makes strategic sense, and that if anyone could pull off such a deal, it is Mr. Marchionne.

I am less sanguine. My stance toward Fiat/Chrysler/Opel therefore remains: Guilty until proven innocent.

As I mentioned in a recent post Legal Issues Affecting Chrysler:

…the dissident lenders have a valid complaint. Unfortunately, they are swimming upstream. They are not only in the minority among Chrysler’s creditors in opposing the Fiat deal, but in the minority among their own class of creditors (the total group of first lien holders including the likes of Citigroup and JP Morgan).

Sure enough, a few days later, many of Chrysler’s dissident lenders dropped their opposition to the Fiat/Chrysler deal (see Chrysler Lenders Drop Opposition). According to the Washington Post:

The small but staunch lenders group that stood against the sale of Chrysler disbanded Friday, removing the only major obstacle in the Obama administration’s plan to quickly restructure the automaker in bankruptcy court.

The breakup of the organized opposition improves the government’s odds of getting Chrysler out of bankruptcy quickly and could portend a similar road for General Motors should it also be forced to file for protection.

Now that Chrysler’s dissident lenders have caved, it is becoming increasingly likely that Chrysler’s bankruptcy will be a surgical one after all, contrary to my initial expectations (see Chrysler Bankruptcy: Anything but Surgical). I did not anticipate that the dissident lenders would so quickly reach their legal fee threshold.

…the legal costs…were a factor in dropping the public objection.

Irrespective of their financial wherewithal, dropping their opposition to the deal was probably a wise decision on the part of dissident creditors. They saw the writing on the wall. They weren’t going to win. And it’s no fun taking on the federal government, …even in the best of circumstances.

But now the question becomes: What does this all mean for GM?

Several weeks ago, in an Op-Ed for Advertising Age (subscription only, see GM and Chrysler: Finally a Sensible Approach or Ad Age Op-Ed for background) I wrote:

Should Chrysler go bankrupt (a likely outcome), the federal government gets to play a strong hand against GM. Allowing Chrysler to go bankrupt should be enough to wake up GM’s creditors and the UAW to the reality that US taxpayers will not support them indefinitely. It therefore acts as a signal to GM that the Obama administration is serious.

Sure enough, in a press conference held today, Fritz Henderson, CEO of GM, admitted that keeping GM out of bankruptcy will be difficult (see GM CEO Says Tasks are Large). From the Associated Press:

Bankruptcy protection for the biggest U.S. automaker is becoming more probable with a deadline just over two weeks away, the company’s top executive told reporters Monday.

General Motors Corp. CEO Fritz Henderson is still holding out hope that the company can restructure without court protection, but he says the tasks to complete before a June 1 government-imposed deadline are large.

“Certainly the task that we have in front of us is large,” Henderson said during a conference call to update the company’s restructuring efforts. “There is still an opportunity and still a chance for it to be done outside of a court process.”

…the company must reach concessionary agreements with unions, persuade thousands of bondholders to exchange $27 billion in debt for 10 percent of GM’s stock, cut thousands of dealers, close plants and lay off more salaried workers.

Of all stakeholders, the largest impediment to an out-of-court restructuring will come from GM’s bondholders, as was the case with Chrysler (although in Chrysler’s case there were only bank lenders, not bondholders). According to the Associated Press:

GM cannot modify its stock exchange offer to bondholders because the company has been told by the Treasury Department that it cannot go above 10 percent of the company’s equity, Henderson said.

A committee representing the bondholders has counteroffered seeking a 58 percent ownership stake.

Here we go again. As with Chrysler, the senior creditors want one thing, and the government wants something else. So does the federal government get GM bondholders to accept a massive haircut of the type that they were effectively able to cram down the throats of Chrysler’s lenders?

This is where Chrysler’s situation and GM’s situation diverge.

Although the debt restructuring problems they both face are the same in theory, in the case of Chrysler, it was much easier for the federal government to get Chrysler’s lenders to accept a haircut because the majority of its first lien debt sat with banks that accepted TARP money (e.g., Citigroup and JP Morgan). The government could therefore exert tremendous influence over these lenders.

Not so in the case of GM. GM’s bondholders are a much more diffuse bunch with disparate interests. Moreover, the government has much less of a direct influence over GM’s bondholders.

GM is obviously a much larger organization than Chrysler. So sorting out the details in bankruptcy will therefore be more complex. Nevertheless, be prepared for a longer, more drawn out, more complex negotiation with bondholders for GM than for Chrysler, unless the Obama administration can find some way to effectively use outcomes of the Chrysler case to convince GM’s bondholders to take their medicine outside the court system (e.g., by demonstrating the triumph of the “fresh start” provision over the the “absolute priority” rule – see Legal Issues Affecting Chrysler).

Steve Jakubowski is at it again (see Chrysler Bankruptcy: Anything but Surgical for background). In Steve’s latest post (Will the Absolute Priority Rule Kill the Sale?) he gets right to the heart of the matter:

When does the “absolute priority rule”…which establishes a hierarchy of recovery rights among creditor classes take a back seat to the “fresh start” rehabilitative policy of chapter 11?

Chrysler is arguing that it should be permitted to move forward with the Fiat deal as a means of getting a “fresh start” of the kind that bankruptcy law was designed to allow. The dissenting lenders, by contrast, are arguing that they deserve priority as first lien holders, that their claims should take precedence above all others, and that they should be allowed to liquidate Chrysler if they feel that is in the best interest of the first lien holders.

Steve writes:

Chrysler’s argument is essentially that it’s a “dead man walking”… [and] that if the “sale” doesn’t close on the accelerated timetable proposed, it will wither on the vine, resulting in “a rapid and severe loss of value.” …the transaction should be approved because, first, Old Chrysler is receiving “fair consideration” in the transaction and, second, Chrysler’s going concern value will be preserved, jobs will be retained, and an extensive network of independent dealers and suppliers will live to see another day.

Is that enough to approve the Fiat deal over the objections of the dissident lenders? According to Steve:

Surprisingly, though, Chrysler’s opening memorandum doesn’t squarely address the issue laid bare in my previous post and in the preliminary objection of the dissident lenders; that is, why isn’t the proposed transaction a sub rosa plan of the kind prohibited under the law of the Second Circuit?…Chrysler’s opening memorandum of law…[also] does not address the important question of why, absent the consent of the dissident lenders, 65% of the equity in New Chrysler should go to junior creditors in satisfaction of their respective claims against Old Chrysler while the claims of senior dissenting lenders go unpaid?

By sub rosa, Steve is referring to a Latin term meaning secret or covert. In essence, the dissident lenders are arguing that the government, in conjunction with Fiat and the rest of Chrysler’s creditors, are trying to run an end around, making a deal that neither respects their rights nor makes them whole. Moreover, the dissident lenders feel that the deal has been crammed down their throats in a less than transparent way.

In my opinion, the dissident lenders have a valid complaint. Unfortunately, they are swimming upstream. They are not only in the minority among Chrysler’s creditors in opposing the Fiat deal, but in the minority among their own class of creditors (the total group of first lien holders including the likes of Citigroup and JP Morgan).

Given the incentives of the various interested parties (e.g., the auto union, the US government, Chrysler’s suppliers, Chrysler’s dealers) and their status as junior creditors, it is no surprise that junior creditors would support the Fiat deal. But why, you might ask, would various of the first lien holders agree to a substantial haircut when it is possible that they might be better off liquidating Chrysler? Because the majority of the debt held by first lien holders resides with banks that accepted TARP money. And the federal government can exert a tremendous amount of influence over these creditors. This is the krux of the objection of the dissident lenders.

As explained by the Associated Press (see Chrysler Files for Bankruptcy):

…a group of funds identifying themselves as 20 of Chrysler’s “non-TARP lenders” released a statement saying they had been sidelined during negotiations between lenders and the government. The group, which said it holds $1 billion in Chrysler debt, complained that the four banks were “obviously conflicted” because they had accepted money from the government’s Troubled Asset Relief Program while they had not gotten TARP money.

Fascinating stuff. And kudos to Steve on a wonderful legal analysis of this complex problem! Please do visit his post Will the Absolute Priority Rule Kill the Sale? to read the full story.

With Chrysler now in bankruptcy, our attention will turn to whether Obama’s promise of a short and surgical bankruptcy, coupled with an alliance agreement with Fiat, will ultimately be realized. Steve Jakubowski has presented some interesting legal analysis of the Chrysler bankruptcy (see Assessing the Financial Carnage and Testing the Limits of 363 – ht CalculatedRisk).

Although Steve analyzes the bankruptcy from a legal perspective, there are some interesting strategic dilemmas that emerge. For example, Steve went through the legal filings to piece together Chrysler’s balance sheet and financial standing. He points out:

• The claims of the top 50 unsecured creditors total $730 million, with total trade at about $1.5 billion.
• The claims of the senior secured lenders total $6.9 billion.
• The USA is owed $4 billion, secured by a third priority lien.
• Cerberus and Damiler AG are owed $2 billion secured by a second priority lien.
• An additional approximately $8.5 billion is owed to the VEBA funds that were designed to cover the costs of unionized retiree health benefits.

This raises an interesting set of questions. For example, why would the secured lenders be willing to take $2 billion to settle their claims? After all, they are technically first in line (after the DIP financier). Moreover, they feel that the federal government tried to cram down a Fiat deal in which unsecured creditors have been unduly favored over secured creditors. They argue that in liquidation they might be better off trying to recoup their money. Assuming Chrysler’s assets still have some value (which the truck, minivan, and Jeep lines probably do), they might be right. So to a certain extent I cannot blame them for not backing down.

By contrast, Chrysler’s representatives maintain that the secured creditors are likely to recover very little in the event of liquidation. As Steve points out:

In the end, however, the matter will be determined by the opinion testimony elicited from the parties’ opposing experts (with Houlihan Lokey’s Eric Siegert representing the dissenting lenders and Capstone Advisory Group’s Robert Manzo, who prepared this 166 page first day affidavit / expert report, representing Chrysler).  Notably, Manzo concludes in his affidavit (pp. 26-27) that:

Based on the Liquidation Analysis, the First Lien holders are expected to recover between 9% and 38% of their claims, on a net present value basis, [which] translates into a range of between $654 million and $2.6 billion.  It is my professional opinion that given the market developments subsequent to this analysis, coupled with the limited success of other OEM effort to move individual car lines, the First Lien holders would likely recover at the low end of this range as part of any liquidation of the Company. The U.S. Treasury is only expected to recover between 3% and 6% of its claims.

Since Chrysler obviously favors the Fiat deal, it is not a surprise that they “believe” that the first lien holders are making a mistake. I am not so sure I agree with that position, as again, I think there might be a bit more value in Chrysler’s products and brands.

Another interesting point that comes out of Steve’s analysis is that the US government is third in line, after the bank lenders and Cerberus/Daimler. Therefore, in liquidation, it is unclear that the taxpayer would receive much in return. But that begs the question, is it better to get nothing in return for a $4 Billion loan, or lend invest an additional $6 Billion to support a Fiat deal (putting the taxpayer $10 Billion in the hole) with the prospect of still getting nothing in return? And under the Fiat scenario, the federal government’s claim would only be in equity, meaning that in the event of future bankruptcy, the taxpayer will be among the first to get wiped out. So again, it’s unclear to me that the Fiat deal is in the best interests of the taxpayer.

Now I am not a legal expert, but Steve makes some interesting points with respect to the role of the judge in cases such as these. He writes:

In concluding that the debtor…should be sold outside of the context of a reorganization plan, he [the judge] asks:

• Is there evidence of a need for speed?
• What is the business justification?
• Is the case sufficiently mature to assure due process?
• Is the proposed APA sufficiently straightforward to facilitate competitive bids or is the purchaser the only potential interested party?
• Have the assets been aggressively marketed in an active market?
• Are the fiduciaries that control the debtor truly disinterested?
• Does the proposed sale include all of a debtor’s assets and does it include the “crown jewel” (noting that “the likelihood of approval of the § 363 sale is inversely proportional to the percentage of the value of the debtor’s assets that are to be sold”)?
• What extraordinary protections does the purchaser want?
• How burdensome would it be to propose the sale as part of confirmation of a chapter 11 plan?
• Who will benefit from the sale?
• Are special adequate protection measures necessary and possible?
• Was the hearing a true adversary presentation?  Is the integrity of the bankruptcy process protected?
• What other factors apply to the case at hand that tip the balance or that overweigh the evaluative factors set forth above?

The most interesting question to me is the one about “Are the fiduciaries that control the debtor truly disinterested?” In this case the fiduciary that controls the debtor is the federal government since it is my understanding that it will act as a the trustee. On that basis, since the government is both creditor and trustee, how can it be disinterested??

Also, another interesting consideration is whether the Fiat deal unduly favors the auto union, and Chrysler’s retirees, vis-a-vis secured creditors. Again, I am not a legal expert, so it is not entirely crystal clear to me which claims comes first in bankruptcy (secured creditor claims or VEBA claims), although if I am not mistaken, the claims of the auto union should be unsecured claims and therefore junior to secured creditors. Either way, a 55% ownership stake in Chrysler for the union seemed a bit rich to me.

Steve concludes by reminding readers:

never forget that in litigation, nothing is guaranteed.  Indeed, much depends on the judge drawn.  The judge overseeing this case is Judge Arthur Gonzalez, who proved…that he will adhere to what he believes the law requires, even if the financial markets turn upside down because of it.

So, who will win?  Really, only the true speculator and/or holder of Chrysler credit default swaps will (and perhaps Fiat if they–unlike their predecessors–can make it work), as my first post on the financial carnage at Chrysler demonstrates.  My guess is that after much briefing, discovery, and expedited litigation over the next 60 days, Judge Gonzalez will show enough angst to worry both sides that they stand to lose, thus resulting in a compromise that settles the matter and allows the transaction to go forward.  But with all Chrysler plants and operations now idled pending a final sale, the pressure to get the deal consummated and return people to work will be so overwhelming that it’s hard to imagine Judge Gonzalez not approving the transaction in some form that’s acceptable to everyone (except perhaps the dissenting lenders).

Steve claims that there is chance that Fiat might be a winner if they can make this deal work. As I’ve written before, I view Fiat’s chances of success as a low probability event (see Fiasco for Fiat or Now Introducing Fiat/Chrysler).

Irrespective of the outcome, one thing is certain: This is going to be a fascinating showdown – one that is extremely complex from both a legal and strategic perspective.

UPDATE: It looks like the deal is off (for now at least). Even the article to which I linked below has been pulled in favor of another. The latest is that Chrysler’s creditors rejected the government’s offer (see Chrysler Talks Seen on the Rocks). The question now becomes: Is this truly a temporary bankruptcy in which the deal with Fiat is done but minor structural details need to be ironed out; or, will everyone (Fiat, Chrysler creditors, the federal government, and the UAW) come to their senses and realize that this is a lost cause and that Chrysler should be liquidated?

I leave the original post, as it expresses many of my concerns regarding a Fiat/Chrysler alliance.

——————————————————-

And there you have it.

According to the Associated Press, Fiat will sign a pact with Chrysler to officially extend its existence as a going concern (see Fiat to Sign Partnership Deal).

Italian automaker Fiat Group SpA will sign paperwork to become a partner with Chrysler LLC by Thursday, according to three people briefed on the deal…

“It’ll be signed by tomorrow, I know that,” one of the people [familiar with the deal] told The Associated Press.

As I’ve mentioned before, I am not convinced that this alliance is the best outcome for Chrysler, Fiat, the auto industry, or the U.S. taxpayer (see Fiasco for Fiat? or Chrysler Miracle for background). The following issues concern me:

1. Are the auto union concessions enough to make Chrysler viable for the long run, …especially since the various agreements with the auto union did not involve wage cuts that would make Chrysler more competitive on an operating basis moving forward.
2. Is the taxpayer getting a fair shake in exchanging $10 Billion ($4 Billion in outstanding loans plus an additional $6 Billion cash) for a 10% stake in Chrysler? I am assuming that the additional $6 Billion that the federal government intends to pump into Chrysler has already been factored into its 10% stake in Chrysler. If so, by that calculus, Chrysler would be worth an imputed $100 Billion (if not, at the very least they are valuing Chrysler at $40 Billion). That’s more-or-less the current valuation of GM. Is Chrysler really worth that much?? Under such generous exchange terms, it is possible that the taxpayer would have been better off calling the preexisting loans and simply liquidating Chrysler.
3. Is Fiat up to the task? It has entered and exited the U.S. market once already. Are we looking at a possible repeat performance? Let’s not forget that Fiat is a firm that, as little as two years ago, was on the verge of bankruptcy itself.
4. Fiat is not prepared for what it is about to get into by acquiring a stake in Chrysler. Global expansion and integration is difficult enough in the best of circumstances, but Fiat is now acquiring a feeble company with little in the way of design and product capabilities. It is not clear that Fiat will be able to manage the cross-cultural complexities associated with this deal. Moreover, it is possible that Chrysler’s products (even with technology infusions from Fiat) will not improve quickly enough for it to become a profitable enterprise.
5. The global auto industry continues to be plagued by massive overcapacity. Keeping a weak competitor like Chrysler around will certainly not resolve systemic overcapacity in any meaningful way.

So while it looks like there is currently a future for Chrysler, it might prove to be a temporary future. It is entirely possible that despite the effort, Chrysler might end up right back in the same place in a few short years – on the verge of bankruptcy.