Tuesday, June 16, 2009

Let creditors eat equity and be thankful for it

If you lend money to a company, you have a senior claim on the company's assets. Before you’ve underwritten the loan, you checked to make sure you have the appropriate level of asset coverage – the value of the assets is more than sufficient to get your money back. Otherwise you wouldn’t lend the money. That means if the company becomes bankrupt, you as a creditor can start selling. You bring in the bidders and assets get liquidated until you are paid in full.

Wrong. In this brave new world, lenders are scum, and are treated that way. The current administration started the trend with Chrysler. The government decided the union should take priority over the creditors and the creditors have no say in the company’s sale to Fiat. Creditors, take some equity and shut up.

This is equivalent to someone taking out a mortgage, defaulting on it, and then telling the bank the borrower won’t be paying it back. Instead the bank is forced to become a part owner in the house and cousin Vinny also becomes a part owner.

The trend is spreading.

From the WSJ:
Within days of a bankruptcy-court judge's approval of the government's plan to sell Chrysler to Fiat SpA and leave creditors with big losses, a lawyer in the bankruptcy case of the National Hockey League's Phoenix Coyotes invoked Chrysler in trying to push through the speedy sale of the team.

What happened to creditors having a say in the sale? What happened to getting bidders and trying to extract value?

From the NYTimes:
Six Flags will not sell assets or reduce its workforce as a result of its Chapter 11 bankruptcy filing this weekend, the theme park operator’s chief executive told CNBC on Monday.
“This isn’t a liquidation,” Mark Shapiro told the news service. “This is about the past. This is about debt that’s been around for just too long.”

Hah? Debt has been around too long? What happened to the old notion that when you borrow money, you have to pay it back? If you can’t pay it back, you need to sell assets to pay back as much as possible.

How dare those greedy Wall Street lenders demand to be made whole. Contract law? No, they should be thankful for some equity we stuffed them with. Welcome to the new Obama Republic.
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