Chrysler Cramdown in Context

If you read the coverage of the Chrysler bankruptcy a few days ago in The Wall Street Journal and The New York Times, you might have come away confused about how likely the Obama administration’s plan is to go through. Fortunately, Bloomberg clears it up for us.

On Friday the Times wrote that:

Bankruptcy always contains some element of unpredictability, and the minority of debtholders who oppose the new arrangement could argue in court that the company is worth more to them in liquidation.

But administration officials said they believed that it was highly unlikely that a bankruptcy court judge would side with the minority when those holding 70 percent of the debt had signed off on the arrangement.

The Journal:

The smaller lenders and funds pose some threat to the process of restructuring Chrysler, said attorneys and bankers involved in the matter. They’ll likely argue in court the U.S. is overriding contract law, bankruptcy law and constitutional protections against the seizure of private property.

The Journal, in its main Chrysler stories, somehow doesn’t mention the fact that more than 70 percent of Chrysler’s bondholders have signed off on the government’s “cramdown” plan. Instead, in its lenders story, it focuses on the wrong metric—the total number of lenders.

As of late Wednesday, about 20 of the 46 lenders were opposed to the government plan, according to a statement from a group of debtholders. If more than half the lenders oppose the reorganization, the Chrysler deal could be stuck in bankruptcy court for far longer than the government hopes.

But as other reporting, including the Journal’s has made clear, it was the smaller bondholders that held out, while the big guys signed off on the plan. That means even if half the bondholders opposed the government plan, it doesn’t mean anywhere near half the votes (by bond value) opposed it, which is the number that matters.

At least that’s what Bloomberg says. And they have reporting to back it up:

“Junior creditors are ordinarily not entitled to anything until senior secured creditors like our investors are repaid in full,” the dissidents said in the statement.

Freeze. Okay, sounds like the WSJ there. But unlike the Journal’s remarkably lender-friendly story, Bloomberg slaps down the bondholders’ spin and gives its readers the full picture in the paragraphs immediately following:

The absolute priority rule is regularly modified in bankruptcy court, said Richard Hahn, co-chairman of the bankruptcy practice at Debevoise & Plimpton LLP, a New York law firm that isn’t involved in the Chrysler negotiations. Two- thirds of the lenders can force the holdouts to go along with them in a procedure called a cram-down.

“The U.S. bankruptcy code foresees the possibility that it may be necessary to vary from absolute priority, in particular when a two-thirds majority is convinced it makes legal or business sense,” Hahn said. “If the government has consents from 70 percent, that’s more than enough” to give equity to junior creditors.

Good work by Bloomberg.

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Ryan Chittum is a former Wall Street Journal reporter, and deputy editor of The Audit, CJR's business section. If you see notable business journalism, give him a heads-up at Follow him on Twitter at @ryanchittum.