Indiana treasurer: Objection has delayed sale of Chrysler

2009-06-04T00:00:00Z Indiana treasurer: Objection has delayed sale of ChryslerThe Associated Press The Associated Press
June 04, 2009 12:00 am  • 

The U.S. Court of Appeals for the 2nd Circuit in New York will hear arguments on behalf of three Indiana retirement and construction funds that objected to the bankruptcy sale of Chrysler's assets, according to the Indiana treasurer's office.

The court made the decision Tuesday night. Lawyers for the Indiana State Police Pension Fund, the Indiana Teacher's Retirement Fund and the Major Moves Construction Fund are expected to file briefs today and begin oral arguments Friday. The funds were the only creditor to file an objection to Chrysler's bankruptcy plan.

"We are pleased the Court of Appeals has agreed to hear our arguments," Treasurer Richard Mourdock said in a news release. "As we have stated from the beginning, Indiana retirees and Indiana taxpayers have suffered losses because of unprecedented and illegal acts of the federal government."

The state treasurer's office said this move will delay the proposed Friday sale of Chrysler's assets to Fiat.

Chrysler has maintained the deal with Fiat Group SpA is its only hope of avoiding selling itself off piece by piece. If the sale doesn't close by June 15, Fiat has the option to pull out of the deal.

The Indiana funds hold $42.5 million of the automaker's $6.9 billion in secured debt. The funds bought that debt in July 2008 for 43 cents on the dollar when the Standard & Poor's credit rating for Chrysler was B-, that is, "non-investment grade," which signifies the issuer has the ability to repay debt but faces significant uncertainties.

Chrysler struck a deal with the majority of secured lenders to give lenders $2 billion in cash, or 29 cents on the dollar, to erase the debt. But the automaker was forced to file Chapter 11 bankruptcy because some of the debt holders balked at the deal. Chrysler entered bankruptcy protection April 30.

Indiana is arguing the plan doesn't fairly compensate secured creditors and instead rewards the "government's preferred unsecured creditors." The state also said the government illegally used Troubled Asset Relief Program funds to help a nonfinancial institution, and that the sale is an "insider transaction."

David Stowell, professor of finance at Northwestern University's Kellogg School of Management, said he felt sorry for people who bought Chrysler debt years ago only to have it subsequently worth pennies on the dollar. He said he also is sympathetic to investors who bought the debt as a "dangerous security" more recently because contract law still would traditionally support their claims before those of the United Auto Workers in a typical bankruptcy.

Late Sunday, Judge Arthur Gonzalez, the bankruptcy judge overseeing Chrysler's case, issued a ruling that approved Chrysler's sale to Fiat following three days of testimony and arguments. Gonzalez also ruled the Indiana funds do not have standing to challenge the use of Troubled Asset Relief Program money because they will receive their fair share of money, which is more than they would receive if Chrysler were to liquidate its assets.

Under the bankruptcy agreement's terms, a United Auto Workers union retiree health care trust will receive a 55 percent stake in the new company, while Fiat will get a 20 percent stake that can increase to 35 percent. The remaining 10 percent of the company will be owned by the U.S. and Canadian governments.

NU's Stowell said it's going to be tough for opposition to slow down the bankruptcy plan because of the amount and extent of government support involved.

"This is a unique situation, (because) not only is this a large company, but the largest shareholder is the U.S. government," Stowell said. "This thing won't be delayed very long because you've got the resources from the government. Chrysler is sort of a template for GM. This is almost a prepackaged bankruptcy."

According to Standard & Poor's Ratings Services, Chrysler's corporate credit rating for long-term debt was lowered to B- from B on July 31, 2008, and it warned of future credit deterioration. S&P's credit rating for Chrysler continued to free-fall after that point last year, and on April 30, it assigned its lowest rating, D, which signifies payment default on financial commitments.

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