Wednesday, May 20, 2009

Fund Managers Burned by Obama will avoid lending to unionized companies

Fund Managers Burned by Obama Now Say They Are Wary
By Caroline Salas
May 20, 2009

May 20 (Bloomberg) -- 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., 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.”

Dissident Lenders

Schultze, whose firm had about $247.7 million under management in February, according to a regulatory filing, declined to disclose which company debt he may avoid.

He was among the last holdouts. The dissident lenders to the Auburn Hills, Michigan-based automaker -- including OppenheimerFunds Inc. and Perella Weinberg Capital Management LP, both in New York -- caved after Obama blamed hedge fund “speculators” for the bankruptcy of the 83-year-old car company and said he stood with its employees.

At its peak, the group consisted of 30 funds holding more than $1 billion, according to Tom Lauria of White & Case LLP, the investors’ attorney, who is based in Miami and New York.

“Anything that involves a large number of jobs or affects a large number of people, you can expect to see a Chrysler redux,” Jerry del Missier, president of Barclays Capital, said in an interview from his New York office. “One of the consequences here is the so-called speculators, people who provide financing, will think twice about getting involved.”

Barclays Plc, based in London, is the third-biggest U.K. bank.

‘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.”
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