Chrysler Plan Carries Extra Costs, Say Turnaround Experts

CHICAGO, May 29, 2009 As Chrysler wends its way through U.S. bankruptcy court, most turnaround experts said the deal steered by the federal government to pay the carmaker's secured lenders roughly 30 cents on the dollar will drive up the price of secured loans and make them harder to obtain.

Half of the 29 Opinion Leaders responding to the Turnaround Management Association's Flash Watch Poll said the government proposal that elevated certain unsecured creditors above secured creditors will result in higher-priced loans. Another 35 percent predict that Chrysler's experience will make lenders less inclined to provide loans. Companies obtaining such loans are likely to find more restrictive covenants attached, according to nearly 20 percent of respondents.

"It appears that a sizable percentage of restructuring professionals are concerned that credit, which is already tight, will become more difficult to obtain and more costly for those companies in restructuring mode," said Thomas Pabst, chief operating officer of the Great American Group in Deerfield, Ill.

"There was an overreaction of some business people by claiming that this will be the end of secured lending. It will make lenders be more careful in valuing their collateral and that of lenders above them in the capital structure, but that trend has already started," said James Shein, a professor at Northwestern University's Kellogg School of Management in Chicago.

Nearly 40 percent said the plan will have no effect because Chrysler's secured debt holders abdicated their position and voluntarily accepted the government cramdown. Another 31 percent said the government's actions would set a precedent for avoiding the priority of payment rules established by Section 507 of the U.S. Bankruptcy Code.

"The government has used its power to broker a settlement for the greater good of the economy. However, if the bankruptcy process is going to continue to be the basis for corporate restructurings and liquidations, it must be perceived as fair and impartial," said Mark Indelicato, TMA vice president of chapter relations and a partner with Hahn & Hessen LLP in New York.