Did Chrysler’s Lenders Blink?

Chrysler’s secured bank lenders have returned to the bargaining table with a new proposal.

From the NYT:

The latest proposal by the lenders’ steering committee would give the creditors about 54 cents on the dollar for their holdings, or $3.75 billion, as well as the 40 percent equity stake. The proposal also drops creditors’ demands that Italian carmaker Fiat contribute capital to its proposed alliance with Chrysler.

The lenders had previously asked for repayment of 65 cents on the dollar and a 40 percent equity stake in Chrysler.

Yet a gap remains between the two sides, although it has shrunken considerably over the past two weeks. The government’s most recent offer, made on Wednesday, would give the creditors 22 cents on the dollar, or $1.5 billion, and a 5 percent equity stake in Chrysler. Its first proposal, delivered late on April 12, offered just $1 billion and no equity.

That still seems like a pretty big gap to me and suggests that the government is going to have to bump their offer a lot. Since any counter offer from the government would probably have to include more equity that and how you value it become the key variables.

If the banks gobble up 40% of the equity it’s hard to see how you accommodate the other players — Fiat, the unions and the government. Deal Journal reported a couple of days ago that Fiat wanted 20% to 30% of Chrysler. If you take the lower number than 60% is eaten up and you still have to accommodate the union pension plans and the government. I don’t see them taking 40% or less for what would probably be the most risk in the deal. Then again, the government is playing with taxpayer dollars so they might not negotiate that hard.

As I understand it, the bank loans are secured and they feel pretty comfortable with a liquidation value around 65%. The fact they did come down may be more political gesture than any substantive move. If their recovery figures are correct, it again wouldn’t leave much room for further negotiations. They may budge on the equity a bit but not the cash part of the deal.

One item in the Times article mystified me.

The lenders have argued that their loans are backed by nearly all of Chrysler’s assets, including plants, equipment and brands. Should the company be forced to file, it could lead to a bruising legal fight, with the senior creditors arguing that they have first right to the carmaker’s assets — even ahead of the government.

It would seem to be a matter of fact that they either do or do not have a perfected security interest. If they do then I fail to see why a “bruising legal fight” might ensue. If I’m missing something here please let me know.

I’d still bet on a bankruptcy but I’m a little less sure than I was a couple of days ago.

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