U.S. interventions may usher in bond chill effect

NEW YORK (Reuters) - Unprecedented government intervention in Chrysler LLC and General Motors Corp may have a chilling impact on bond investors, ultimately raising borrowing costs for other U.S. companies.

Political interference now represents the biggest wild card in a debt market that is just beginning to recover from a global financial crisis, analysts say. The uncertainty may lead to a reluctance among investors, whose involvement is crucial to get credit markets flowing again.

Plans for restructuring Chrysler, which filed for bankruptcy last month, and General Motors Corp would leave investors with far lower payouts than they expected based on their legal rights and priority of claims, analysts said.

Chrysler's bankruptcy "brought to life the political risks facing investors of big cyclical companies," said Dan Fuss, who helps oversee more than $100 billion of assets at Loomis Sayles in Boston. The risk premium on big cyclical companies will widen substantially, he said.

"The rules have been changed in these types of names and you will see a lack of buying in them," Fuss said.

GM has said it may file for bankruptcy by June 1 if bondholders do not agree to a debt exchange offer that would give them a fraction of the payout being offered for United Auto Workers claims.

DAMAGING PRECEDENT?

GM CEO Fritz Henderson said on Monday that the U.S. Treasury had set a maximum of 10 percent equity for bondholders in exchange for their $27 billion in debt in any restructuring. The UAW was offered 39 percent equity and $10 billion in cash for $20 billion in claims.

GM's offer would have to be "materially improved" to get approval of a substantial number of unsecured bondholders, a source familiar with a 10-member GM bondholder committee told Reuters on Monday.

Some investors who specialize in picking up the pieces in distressed debt opportunities are staying on the sidelines as they watch creditors who lent money to Chrysler and GM get squeezed.

"The government is intervening more and pressuring the rights of bondholders and other creditors," said Edward Grebeck, chief executive officer of Tempus Advisors. "That is a very damaging precedent to restructurings going forward. Distressed investors will have great cause for concern."

The Obama administration took an active role in restructurings at Chrysler and GM after the automakers accepted about $19.4 billion in government bailout funds.

HEDGE FUNDS MAY BALK

"It's fairly remarkable for the federal government to insert itself into bankruptcy negotiations like this and it will have a material impact on debtholder recovery," said Christopher Garman, a veteran high-yield bond strategist and founder of Garman Research in Orinda, California.

"I think we're just seeing the initial consequences of increasing government roles in some of these sectors but it really does seem that it's going to keep expanding and continuing for some time," he said.

Prominent hedge fund manager Clifford Asness, who runs a $20 billion money management firm, said last week that without a bankruptcy process that fairly divides up a company's assets based on contracts, no one would lend to risky borrowers.

"The President and his team sought to avoid having Chrysler go through this process, proposing their own plan for reorganizing the company," Asness said in a statement.

Hedge funds may now balk at a government plan to have them buy up troubled securities because they know what happens "if they ask for their money to be repaid fairly," he said.

To be sure, some market participants said the worst credit crisis since the Great Depression called for a stronger hand by the Obama administration.

"I'm OK with it," said Joseph Heider, president of Dawson Companies, an investment advisory and asset management firm in Cleveland, Ohio. "These are unprecedented times, and the government had to intervene. There will be risks that neither I nor anyone else can foresee at this point in time."

(Additional reporting by Jennifer Ablan; Editing by Chizu Nomiyama)