Chrysler Files for Chapter 11

April 30, 2009

Chrysler LLC may have put together a package of concessions and agreements with the government, Italy's Fiat, and the United Auto Workers (UAW--but the refusal of bondholders to take about 32 cents on the dollar for their investments has led Chrysler into Chapter 11.

The White House confirmed this morning that Chrysler will be headed to bankruptcy court as its efforts to restructure out of court went almost all the way--ultimately only to fail early this morning.

"Short" Chrysler bankruptcy planned, but will it happen?

Just last night, President Obama, in an evening press conference, said there was a better chance for Chrysler to avoid liquidation as negotiations with its unions, Fiat and creditors progressed throughout the day.

"I am actually very hopeful, more hopeful than I was 30 days ago, that we can see a restructuring that maintains a viable Chrysler," said the President.

By the evening, almost all the parties Chrysler needed in consensus were there--save for a group of investors, mostly hedge funds, that had not agreed to take about 30 cents on the dollar for their current investments in Chrysler. Chrysler owes about $6.9 billion to banks and funds; the deal on the table offers those entities $2 billion in cash to exit Chrysler. When talks broke off at about 3 in the morning, it became clear Chrysler would need a bankruptcy proceeding to settle the issue.

Politico reports the Obama administration is seeking a "short" bankruptcy that could be completed in a month or two, but any filing is likely to be met with lawsuits from dealers and shareholders who will be effectively liquidated by the move.

Chrysler plans to offer its Fiat alliance to the courts as proof of its viability and its ability to emerge from a Chapter 11 filing, instead of being steered into a Chapter 7 liquidation.

As Chrysler enters Chapter 11, it's likely the valuable assets of the company would be placed into a new holding company, which would then be allied with Fiat, with the rest being auctioned off.

Cerberus, which bought Chrysler from Daimler AG, will end up losing its stake entirely in the company, according to several sources.

Chrysler and Fiat settled, mostly

For Fiat, the Chrysler deal is said to largely be settled. The plan, which could be announced today, would give Fiat an initial stake of 20 percent in Chrysler.

Chrysler would get access to Fiat's newest small cars, and the two would begin to produce Chrysler-bodied Fiats in the U.S. beginning in 2011. Fiat would likely sell versions of its 500, Panda, Punto and possibly the Bravo compacts, to complement Chrysler's existing large-car and truck lineup. Chrysler would also get access to Fiat's global sales network.

As the deal matures, Fiat's stake in Chrysler could go as high as 35 percent, sources indicate.

UAW in; Nardelli out as CEO?

While Fiat will control about a third of Chrysler eventually, the deal to save Chrysler puts the UAW in the position of being a majority stakeholder in the company. Chrysler owes the UAW's health and pension benefits fund more than $10 billion; in exchange for cutting that number in half, the UAW would get control of 55 percent of Chrysler shares.

The U.S. government's loans to Chrysler would become an 8-percent equity stake; the Canadian government would also get a 2-percent stake in the new Chrysler-Fiat entity.

Employee takeovers of companies have happened before--as with United Airlines--but this could be the largest, most complex operation managed by employee shareholders in history.

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