April 30, 2009 at 12:12 pm

Chrysler creditors may force Chapter 11

Despite Chrysler's best efforts, hedge fund holdouts may mean 'surgical' filing imminent

Washington -- Chrysler LLC's efforts to avoid bankruptcy hinge on a group of hedge funds that late Wednesday were refusing to join other major creditors in agreeing to accept about 33 cents on the dollar for $6.9 billion in secured debt.

That is one of the last remaining deals to be signed before today's deadline set by the Obama administration, as the Auburn Hills company secured a deal with Fiat SpA. President Barack Obama plans to announce today whether Chrysler will have to enter bankruptcy protection, which could happen even if all parties agree. The 33 cents on the dollar offer reverted to 29 cents on the dollar after 6 p.m. Wednesday.

Government officials have insisted that Chrysler could go through a "quick rinse" or "surgical" bankruptcy filing under Section 363(b) of Chapter 11 of the bankruptcy code, allowing for a quick asset sale that could allow the healthy parts of the automaker to emerge in as little as 30 days.

Getting deals with stakeholders ahead of time, including creditors holding more than 70 percent of Chrysler's secured debt, would help in that process.

Chrysler dealers however, could object to a quick emergence, as could the remaining creditors. The dealers national council hired a law firm, Arnold & Porter LLP, to represent them in the event of a Chrysler bankruptcy.

Gregg Lemos-Stein, credit analyst at Standard & Poor's in New York, said: "If all these agreements were approved, or close to being approved, in the event of a bankruptcy, it would be akin to a pre-pack bankruptcy."

The advantage of doing a pre-packaged bankruptcy, as opposed to trying to reach an agreement outside of bankruptcy, is that a bankruptcy would allow a so-called "cram-down" of the holdout creditors -- in this case, the hedge funds that want more.

"The bankruptcy process makes it much more difficult to hold out," Lemos-Stein said.

How soon might Chrysler emerge from a pre-pack bankruptcy?

"In the case of much smaller companies, we've seen them take as little as a few weeks. But it might be much longer and more complicated in Chrysler's case. It's a larger organization, there are more moving parts and more constituencies."

It's unclear if any parties other than Fiat would be willing to bid for Chrysler's assets -- or would outbid the U.S. Treasury.

But analysts have noted that no automaker has entered bankruptcy in more than a half century and emerged successfully. And those auto-related companies that have more recently filed have had difficulty emerging. Troy-based Delphi Corp, which entered bankruptcy protection in October 2005, is one example. General Motors Corp. warned last week that the supplier could face liquidation after Delphi's creditors rejected a deal that would have allowed it to emerge.

A Chrysler bankruptcy likely would be different. The U.S. Treasury would loan Chrysler billions in debtor-in-possession financing -- a major hurdle for Delphi -- so that Chrysler could operate under court protection and would buy the "good" Chrysler, forming a new company.

The "bad" Chrysler, including some dealer agreements and other debts, would remain in bankruptcy and be liquidated over months or years.