Hedge fund manager George Schultze says he may avoid lending to any more unionized companies after being burned by President Barack Obama in Chrysler LLC’s bankruptcy.
Obama put Chrysler under court protection on April 30 after lenders balked at a proposal giving them about 29 cents on the dollar for their $6.9 billion in debt. The investors said the president’s plan favored a union retiree medical fund whose claims ranked behind them for repayment. It was offered a 55 percent equity stake in the automaker.
Pacific Investment Management Co. [this is PIMCO, and it along with Barclay, are heavy players}, Barclays Capital and Fridson Investment Advisors have joined Schultze Asset Management LLC in saying lenders may be unwilling to back unionized companies with underfunded pension and medical obligations, such as airlines and auto-industry suppliers, because Chrysler’s creditors failed to block Obama’s move. The reluctance may put additional pressure on borrowers seeking capital in the worst financial crisis since the Great Depression.
“Lenders will have to figure out how to price this risk,” Schultze, 39, said in a telephone interview from his office in Purchase, New York. “The obvious one is: Don’t lend to a company with big legacy liabilities or demand a much higher rate of interest because you may be leapfrogged in a bankruptcy.”
‘Rights Were Trashed’
Jack Welch, former chief executive officer of General Electric Co., criticized how the government handled Chrysler’s bankruptcy, saying unions were favored at the expense of creditors.
“I didn’t like the terms,” Welch, 73, said in an interview yesterday at the Boston Convention Center. “The creditors’ rights were trashed and the unions got 55 percent of the company.”
A U.S. Treasury spokesperson said the Chrysler bankruptcy “was handled strictly as a commercial transaction, with all parties treated fairly throughout the process.”
The struggle between creditors and labor has also reached Hartmarx Corp., the 122-year-old clothing maker in Chicago that made the suit Obama wore to his inauguration. Unions are gaining government support in a fight against Wells Fargo & Co., the bankrupt company’s lender.
General Motors Corp., which accepted $15.4 billion in U.S. taxpayer aid, is also giving unions preferential treatment over bondholders in its restructuring, even though their claims rank equally. The biggest owners of GM debt include San Mateo, California-based Franklin Resources Inc. and Capital Research & Management Co. of Los Angeles, regulatory filings show.
Detroit-based GM on April 27 asked the investors to swap $27 billion in debt for a 10 percent stake in the reorganized automaker, while offering a retiree health-care fund $10 billion in cash and as much as a 39 percent stake for $20 billion in unsecured claims.
“It’s terrible precedent,” said Schultze. “The sad thing is it impacts the manufacturing sector and the companies that have legacy liabilities directly. It will be nearly impossible, or much more expensive, to get secured financing for these type of companies.”
Unions spent $52 million to help elect Obama, which includes $5 million from the United Auto Workers, according to OpenSecrets.org, a Washington-based organization that tracks campaign spending. Roger Kerson, a spokesman for the UAW in Detroit, declined to comment.
A committee of GM bondholders rejected the offer and asked Obama’s auto task force on April 30 for 58 percent of the company’s equity. Their proposal hasn’t been adopted and bankruptcy is “probable,” Fritz Henderson, GM’s chief executive officer, said in a Bloomberg Television interview last week.
While debt prices haven’t yet reflected the shunning of unionized companies by investors, steel and automakers and airlines will face higher borrowing costs when they attempt to raise funds, Schultze said.
Fort Worth, Texas-based AMR Corp. employs about 90,000 and 67 percent are represented by unions. AMR had about $4.2 billion in underfunded pension obligations as of year-end, according to Fitch Ratings.
“Creditors are justifiably concerned” about what precedent the auto bailouts are setting, said Mark Kiesel, global head of corporate bond portfolios at Pimco in Newport Beach, California. Pimco managed $747 billion as of Dec. 31.
“When you get these companies that have legacy costs, that’s something you have to factor in when evaluating credit risk,” Kiesel said. “Any investor is going to price in increasing political risk in considering where to put their money.”
The government’s “grassroots trend” signals “an increasing uncertainty of cash flows from financial assets” and risk premiums will increase as a result, Gross wrote.
“People are starting to think ‘This is a very activist administration, even more than we counted on,’” said Martin Fridson, CEO of money manager Fridson Investment Advisors in New York. “If it comes down to the interest of creditors or labor unions, the administration is going to override what you thought you could do.”