General Motors Corp., the biggest of Detroit’s Big Three automakers, filed for bankruptcy without the public spat between lenders and the White House that added so much drama to the filing of its smaller rival Chrysler. But that doesn’t mean loan market participants are ready to kiss and make up with the Obama administration, which is in the process of bailing out the U.S. auto industry.
Chrysler sought Chapter 11 protection on April 30 with $6.9 billion in senior secured debt outstanding. The U.S. government, which provided the debtor-in-possession financing, offered first-in-line lenders 29 cents on the dollar in cash, while unions got a 55 percent stake in the company through a vehicle designed to ensure health care benefits for retirees. Some hedge fund managers argued that the banks, which held most of the debt, agreed to the government’s offer because, having taken their own federal bailout as part of the Troubled Asset Relief Program (TARP), they were in no position to protest. “It was only because hedge funds have not taken government funds that they could stand up to this bullying,” Clifford Asness, CEO of AQR Capital Management, asserts in a widely circulated letter. “The TARP recipients had no choice but to go along.”
Hedge fund sources say that behind the scenes the government and other interested parties cranked up the pressure on lenders to sign off on the offer. Some small hedge funds, including Group G Capital Partners and Schultze Asset Management, said they would stand firm to the end, even as larger supporters fell away. A group of Indiana pension funds filed an objection to the bankruptcy and sale to Fiat with the U.S. Court of Appeals for the Second Circuit, but the court wasn’t expected to rule in their favor. Although they knew their chances of victory were slim, the holdouts were determined to take a stand against what they consider to be a dangerous precedent for how lenders will fare when the government intervenes in the bankruptcy process.
