Prominent fund managers across the country are wary of future lending to union-dominated companies after their last bout with the Obama administration, UAW, and Chrysler.
President Obama put Chrysler under bankruptcy protection after lenders objected to the proposal requiring them to take 29 cents on the dollar for the $6.9 billion in debt that they held. The UAW’s retiree medical fund received far more favorable terms (55 percent equity stake in Chrysler), despite ranking be low lenders in the repayment hierarchy.
Schultze Asset Management LLC, Pacific Investment Management Co., Barclays Capital and Fridson Investment Advisors have all expressed skepticism and hesitation on any future lending for unionized companies with “underfunded pension and medical obligations, such as airlines and auto-industry suppliers.” This reluctance could make it more difficult for borrowers to seek capital amidst the current economic downturn. George Schultze of Schultze Asset Management said that lenders will either not lend at all or be forced to charge a much higher rate of interest “because you may be leapfrogged in bankruptcy.”
GM debtholders will likely be squeezed in the same manner as Chrysler’s lenders. Under the proposed terms, GM debtholders would be forced to swap $27 billion in debt for a 10 percent equity stake, compared to the UAW’s retiree health care fund would receive $10 billion in cash plus 39 percent equity stake for only $20 billion in unsecured claims.
The UAW has received generous terms amidst restructuring and bankruptcy discussions. If private capital continues to be forced out thanks to heavy-handed federal intervention on behalf of the UAW, it will be the taxpayer who ends up bailing out the union.