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.

While the UAW would be in the driver's seat, Fiat's leadership would assume management of the new Chrysler. With Cerberus out of the picture, former Home Depot CEO Bob Nardelli would also be excused from Chrysler management.

Aside from those holdout hedge funds, the rest of the pieces for a deal were cleared earlier this week. Daimler AG, which had owned 19.9 percent of Chrysler, said yesterday it would walk away from that stake and would contribute some cash to Chrysler's pensions to bail out of the deal, leaving Chrysler free to strike an alliance deal similar in some ways to the one coined by Nissan and Renault a decade ago.

The Renault-Nissan alliance, for comparison, began with a 44-percent stake in Nissan by Renault, and envisioned wide platform sharing between the companies. That largely hasn't happened, but CEO Carlos Ghosn is in charge of both companies and both are still in business ten years later, with Nissan clocking a remarkable comeback in sales and products in the intervening years. Renault has struggled, though, and Nissan's expensive investments in trucks in the U.S. have not paid off. In fact, Nissan had penned a deal to rebadge Chrysler trucks as Nissan Titans--but that deal went into turnaround when Fiat got serious about investing in Chrysler.

Many questions are unanswered today, and probably will be at the end of the day, regardless of the developments at Chrysler. Is Fiat CEO Sergio Marchionne the new Ghosn--if there ever was a Ghosn miracle in the first place? Is Jeep the brand that kills all its parent companies? And can Fiat--the only company with a less positive reputation in America than Chrysler, in many ways--engineer a turnaround of both brands in the eyes of U.S. car shoppers?

Stay tuned to TheCarConnection.com as we update the Chrysler situation throughout the day.

[Sources: Detroit News, Washington Post, Politico]

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