Hedge fund manager George Schultze says he may avoid lending to any more unionised companies after being burned by US president Barack Obama in Chrysler's bankruptcy.

Obama put Chrysler under court protection on 30 April after lenders balked at a proposal giving them about 29 cents on the dollar for their $6.9bn in debt. The investors said the president's plan favoured a union retiree medical fund whose claims ranked behind them for repayment. It was offered a 55% equity stake in the carmaker.

Pacific Investment Management, Barclays Capital and Fridson Investment Advisors have joined Schultze Asset Management in saying lenders may be unwilling to back unionised companies with underfunded pension and medical obligations, such as airlines and car 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," said Schultze. "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 Chrysler lenders 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 $1bn.

"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. "One of the consequences here is the so-called speculators, people who provide financing, will think twice about getting involved."

General Motors, which accepted $15.4bn in US taxpayer aid, is also giving unions preferential treatment over bondholders in its restructuring, even though their claims rank equally. The biggest owners of GM debt include Franklin Resources and Capital Research & Management Co.

On 27 April, GM asked the investors to swap $27bn in debt for a 10% stake in the reorganised carmaker, while offering a retiree health-care fund $10bn in cash and as much as a 39% stake for $20bn in unsecured claims.

"It's a terrible precedent," said Schultze. "The sad thing is it impacts the manufacturing sector and the companies that have legacy liabilities directly. It will be nearly impossible, or much more expensive, to get secured financing for these type of companies."

Unions spent $52m to help elect Obama, which includes $5m from the United Auto Workers, according to OpenSecrets.org, a Washington-based organisation that tracks campaign spending. Roger Kerson, a spokesman for the UAW in Detroit, declined to comment.

A committee of GM bondholders rejected the offer and asked Obama's auto task force on 30 April for 58% of the company's equity. Their proposal hasn't been adopted and bankruptcy is "probable", said Fritz Henderson, GM's chief executive officer.

The US bankruptcy code allows for workers to get preference over bondholders, said Richard Hahn, a legal expert on bankruptcy practice. Section 1114 of the bankruptcy code requires that a debtor "timely pay" all "retiree benefits" unless the bankruptcy court orders otherwise or the authorised representative of the recipients of those benefits agrees to other treatment, he said.

Chrysler lenders might have recovered nothing if the government hadn't poured billions of dollars into the carmaker, said Gary Hindes, managing director of distressed investments at Deltec Asset Management LLC. The hedge fund firm didn't buy the company's debt or GM's, in part because of the risk the government's involvement would damp returns, Hindes said.

"If you're being paid more than what you would be paid in a liquidation, then the contractual obligation has been met," said Hindes, whose firm oversees about $526m. "It's still very disturbing to see the government basically strong-arm people into this."

While debt prices haven't yet reflected the shunning of unionised companies by investors, steel and automakers and airlines will face higher borrowing costs when they attempt to raise funds, Schultze said.

Chrysler began a bankruptcy process last month designed to revive the business. It will focus on small-car technology through a new partnership with Turin-based Fiat SpA, Italy's biggest automaker. Obama says the plan will save more than 30,000 jobs.

A group of senior secured creditors, the Committee of Chrysler Non-Tarp Lenders, opposed Obama's plan.

Putting labour ahead of them in line for repayment violated "long-recognised legal and business principles," the investors said in a statement the day Chrysler filed for protection.

The committee gave up fighting on 8 May "after a great deal of soul-searching and, quite frankly, agony" and concluded that "they just don't have critical mass to withstand the enormous machinery of the US government", said White & Case's Lauria in an interview that day.

"People are starting to think 'This is a very activist administration, even more than we counted on,'" said Martin Fridson, CEO of money manager Fridson Investment Advisors.

"If it comes down to the interest of creditors or labor unions, the administration is going to override what you thought you could do."

(Bloomberg)