May 1, 2009 / 5:53 AM / 9 years ago

RPT-ANALYSIS-Chrysler quick sale will test bankruptcy limits

* Early sale of core assets could be key

* Shift away from traditional in-bankruptcy restructuring

* Sale hearing expected within weeks

By Caroline Humer

NEW YORK, April 30 (Reuters) - Chrysler LLC’s plan to emerge from bankruptcy hinges on an increasingly popular restructuring move -- the early sale of core assets into a separate company -- and that move, while controversial, may end up being what makes it work.

Chrysler filed for bankruptcy protection in Manhattan bankruptcy court on Thursday, saying it would sell its Chrysler, Jeep and Dodge brands into a new company to be owned by the government, Italian carmaker Fiat SpA FIA.MI and Chrysler workers. [ID:nLU940906]

That sale -- a ‘363 sale’ in bankruptcy-speak -- could see Chrysler emerge from bankruptcy as a successful company within a couple of months as it and the government have advertised.

The rest of the company, however, could spend years in bankruptcy court as creditors fight over how to distribute the value left in the old company, said Stephen Lubben, a bankruptcy professor at Seton Hall Law School in New Jersey.

“I think it probably will work. It seemed to have largely worked in Lehman Brothers, which is the same structure where you had a quick sale to Barclays (BARC.L) of the main assets and then the remainder can kind of plod along through the normal bankruptcy process,” Lubben said.

The sale trend is part of an increasing shift toward quick asset sales in bankruptcy and away from traditional bankruptcy reorganizations where companies restructured over several years.

“More and more in this economic downturn, most cases now are a sale of assets and there are very few real restructurings,” said Deborah Thorne, a bankruptcy attorney at Barnes & Thornburg LLP in Chicago.

Some Chrysler creditors do plan to object to the sale.

A group of about 20 lenders argues that Chrysler’s plan to sell itself compensates creditors in a way that would not be typically allowed under the bankruptcy code. [ID:nN30274581]

But high-pressure sales like this have been approved over objections in the past, Lubben said.

“Just as in Lehman, I expect it to happen because they seem to have all the other major constituencies lined up, including the creditors in this particular class. It could be a very long kind of hearing but ... at the end of the day, the sale order will probably be entered,” Lubben said.

The sale hearing is expected to happen in the next few weeks.

Chrysler is giving itself more time than Lehman LEHMQ.PK did to do the sale.

“30 to 60 days is a generous model. Barclays was start to finish in 7 days,” said Steven Gross, Co-Chair of the Debevoise & Plimpton LLP’s Bankruptcy & Restructuring Group.

In fact, negotiations are still ongoing with bondholders who did not back the plan, and they could reach a consensus at any time.

    Still, some experts said a quick bankruptcy would be difficult with so many different groups.

    “I can’t tell you how many times people say ‘quick’. It’s never quick. Delphi promised a quick one and they’re still in,” said David Bitterman, managing director at Huron Consulting Group. “That’s really been a disadvantage to the entire value of Delphi. The longer they’re in, the worse the outcome for everyone.”

    Auto parts maker Delphi Corp DPHIQ.PK filed for bankruptcy in late 2005.


    The fact that Chrysler has lined up $3.3 billion in debtor-in-possession financing and $4.7 billion in exit financing, both from the government, are important factors in its ability to emerge.

    The availability of bankruptcy filing has been very tight since last fall, making it more difficult for companies to both file for bankruptcy and then emerge.

    Delphi, which was spun off from General Motors Corp (GM.N), is one example of a company that has been mired in bankruptcy because of a lack of funding and the contracting auto market.

    “I don’t think they would have any chance of what they are proposing, which is a short surgical bankruptcy -- without financing both DIP and exit, it would not even be feasible,” said Scott Peltz, a managing director at turnaround firm RSM McGladrey in Chicago.

    Bankruptcy is the best way to deal with the large range of issues the company faces, Peltz said, such as its collective bargaining agreements and other contracts.

    “It’s certainly not guaranteed, but it’s their best chance.” (Additional reporting by Thomas Hals and Emily Chasan) (Editing by Ian Geoghegan)

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