GM Chapter 11 Bankruptcy Revisited?

  General Motors filed the biggest Chapter 11 bankruptcy in history.

Lots of corners were cut, laws and rules ignored for political reasons.

Bondholders, among others, got zip.

The president wanted it over quickly, wanted the unions to come out on top.

Now, it seems, not all of the maneuvering was done in the open – at least, open enough for the presiding Judge to know all the facts.

There is nothing wrong with negotiating with your creditors before filing Chapter 11.

However, bribing them, when you are, by definition, not able to pay all your bills, is a big problem.

Bankruptcy laws in Canada are vastly different from ours.  If GM Canada had been forced into bankruptcy in Canada, the quick in and out of the US GM Chapter 11 could not have occurred.

GM was well aware of this problem.

What to do?

In order to keep the potentially troublesome Canadian creditors from filing suits, putting GM Canada into bankruptcy, and/or mucking up GM’s US Chapter 11 bankruptcy, GM simply paid them off.

3. Benefits of the Lock Up Agreement to the Noteholders

Apart from benefiting GM, the Lock Up Agreement also provided substantial benefits to the Noteholders. The most important benefit to the Noteholders was the US$369 million fee that GM agreed to pay the Noteholders (the “Consent Fee”). The Consent Fee, in effect, repaid the Noteholders of the 2015 Notes 36.6%, and the Noteholders of the 2023 Notes 38.0%, of the principal due on the loans.46 This amount was substantially in excess of what the Noteholders, who were primarily distressed debt investors, had paid for the Notes on the open market. Furthermore, the Lock Up Agreement stipulated that this amount was not being applied to reduce the outstanding principal or interest due on the Notes.47 Thus, the Consent Fee is best characterized as a bribe that GM paid the Noteholders to agree to facilitate GM’s reorganization.

–  from a Columbia Law School paper Deals 2011 GM Canada Paper.pdf – Courseweb

The paper discloses additional benefits GM gave the creditors to get them to sign off on the “lockout agreement.”  Lockout meaning, they would stay out and go along with the program.

So that was years ago, GM has been 0ut of bankruptcy and operating for some time, who cares?

The other creditors, who missed out on the bribe money, have filed suit against the Canadian creditors who got the bribe money, reports Bill McMorris of the Washington Free Beacon.

The upshot?

The GM Chapter 11 case could be re-opened, back to the drawing board.

 

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