A New Day For Bondholders In The USA As Court Refuses To Block Sale Of Chrysler To Fiat

It’s a scary day today for bondholders in the USA. The US Appeals court Friday refused to block the sale of Chrysler to FIAT. Essentially the secured creditors were forced to do what the government thought was best for them. Usually secured bondholders are paid off a % of their holdings after the liquidation of assets. This was not permitted to happen via the Chrysler sale to FIAT. Judge Arthur Gonzalez just set an extremely dangerous precedent, which will have broad implications via capitalism for years to come.

Capital usually flows to countries that have well established rules of law. Bondholders like to know what the rules are and that they will be protected in the event of a default or a Bankruptcy. That used to be the case in the USA. That is no longer the case, effective with today’s ruling. The supreme court is the last hope for rule of law in this country. Today we have moved one step closer to a dictatorial regime, whereby those in charge of running the government are have been set free to think for the collective populace, or in this case the bondholders of Chrysler.

The risks of owning bonds just went higher. Perhaps this will result in a re-rating of bond market risk, which will essentially result in higher financing costs for businesses. This could be an unexpected result of today’s actions.

Bloomberg Story

“The affirmance does set a precedent that the structure of this quick sale is acceptable, and that will help GM and discourage appeals,” said Seton Hall University bankruptcy law professor Stephen Lubben in an interview after the hearing.

The sale would be financed by the U.S. and Canadian governments, which would take equity stakes in the new Chrysler along with Fiat and a worker health-care fund.

“The alternative to the approval of the sale is liquidation,” U.S. Circuit Judge Amalya Kearse said during today’s hearing.

Thomas Lauria, a lawyer representing the Indiana pension funds, who rank as secured creditors, said the decision to approve the sale by bankruptcy judge Arthur Gonzalez puts the concept of secured debt “at great peril.”