Chapter 11 changes put jobs at risk
Bankruptcy reform in favour of labour may just end up causing more firms to fail
Steve Miller, chief executive of Delphi Corp., was in New York this Monday to explain why he was putting the Michigan automotive parts supplier into Chapter 11 bankruptcy.
“ We are broke,” he said, holding his hands in the air. “I am sorry to be the one delivering that message.”
Mr. Miller did not look very sorry. In fact, he seemed like someone whose bargaining position with his employees had just become a lot stronger.
Instead of having to wheedle unions into accepting cuts in pay and benefits for Delphi’s 34,000 hourly-paid US workers, he can threaten them with the company defaulting on its defined-benefit pension plan.
Nor is Delphi broke. It may have lost US$600-million in the first half of the year, but it has plenty of cash to tide it through the two years that it could be in Chapter 11. JP Morgan Chase and Citigroup have underwritten US$2-billion of new loans at better rates than the company achieved when it refinanced in June. As Mr. Miller also observed, Delphi’s bankruptcy is “well-financed, well-organized and well-planned”.
He disdainfully compared Delphi’s approach with the “ disgrace and embarrassment” of Collins & Aikman, a parts supplier that went bankrupt in May amid a liquidity crisis and asked customers to pay more in order to maintain production. Yes indeed, how irresponsible of a company that goes into Chapter 11 to be in dire financial straits at the time.
Organized labour, meet organized capital. Chapter 11 of the Bankruptcy Code used to be regarded as a bizarre U. S. arrangement allowing a troubled company’s managers to stay at the helm and restructure instead of being kicked out by the creditors. Eastern Airlines went into Chapter 11 in 1989 and remained there for two years losing money before collapsing.
These days, managers and creditors are often on the same side from the start. Chapter 11 has become a device for reasserting management fiat over workers with the backing of bankers. Financiers have forced steel industry employees who were used to being highly paid to accept lower wages and fewer benefits. Delphi’s Chapter 11 filing suggests Detroit’s workers and retirees are next in line.
The way that Delphi is handling its bankruptcy shows how things have changed. David Skeel, a University of Pennsylvania law professor, says the interests of managers and creditors have been aligned by two things: companies are supported — and controlled — with specialist financing and managers are given very large financial incentives to act rapidly and to take tough decisions.
Delphi, like most Chapter 11 filers, had negotiated so-called “debtor in possession” (Dip) finance from Wall Street before it went to court.
This gives JP Morgan and Citigroup a priority claim on its assets if things go wrong. The covenants on such loans tend to be structured to give managers sufficient time to negotiate a restructuring but to discourage them from hanging around.
Even more pertinently, managers in Chapter 11 cases have their eyes on the prize of cash and equity bonuses if they can work the company into shape speedily without it having to be broken up. Delphi plans to award up to US$87million in bonuses and 10% of equity in a new company to its 600 most senior managers. They can get richer by persuading the hourly-paid workers to become poorer.
Thus Chapter 11, which used to enable the managers of companies in difficulty to avoid both their creditors and hard decisions, has become fearsomely effective. It is not a panacea — airlines still go in and out of Chapter 11 without curing the industry’s lack of profitability — but it has given other companies a fresh start and helped in the restructuring of a dilapidated steel industry.
All of this carries a price. They say you should not visit a sausage factory if you like eating sausages and in this case the ingredients being ground up for profits are health and (perhaps) pension rights. It does not take a union activist to be disturbed by the prospect of Delphi workers losing benefits that they dedicated their lives to gaining by working there.
The stark contrast between workers’ losses and managers’ gains was one reason for changes to Chapter 11 in the bankruptcy reforms that come into effect next week.
The new law bars companies from paying managers Chapter 11 bonuses and limits the time during which they have the sole right to propose a restructuring plan. Managerial prerogative, as well as wealth, is taking a haircut.
Like many political interventions in financial matters, the reason for the changes is understandable but the danger of unintended consequences is considerable. The law reduces both the carrots given to managers and the sticks they can wield without putting much in their place. If managers have less incentive to sort out the financial problems of U.S. rust-belt industries, who will take on the job?
There is little sign of Washington doing so. Efforts to reform corporate pension rules to relieve the pressure on the Pension Benefit Guaranty Corporation — the federal safety net for underfunded schemes — are now stuck in Congress. Politicians tend to be happier handing out subsidies to companies than imposing rules that will upset potential voters.
Nor will it help if Chapter 11 goes back to a standoff between creditors and managers. The spectacle of Delphi’s “well-financed, well-organized and wellplanned” Chapter 11 filing is strange but it at least promises action. The alternative is to let the industry’s problems fester and its companies drift into, well, bankruptcy.