Bankruptcy for Chrysler Likely Averted as Banks Cave on Debt

Posted by: David Kiley on April 28

Chrysler LLC and the U.S. Treasury Dept. have reached an agreement with banks and private equity firms holding $6.9 billion of the automaker’s debt. Those firms have agreed to take $2 billion and a small equity stake in the company, paving the way, it seems, for Chrysler to avoid bankruptcy and with Italian automaker Fiat.

The deal, first reported by Washingtonpost.com, was confirmed by a Treasury official who said: “The agreement from Chrysler’s principal banks is an exceptional accomplishment in line with the President’s firm commitment that all stakeholders sacrifice to make this deal succeed.”

Details of the deal may come officially from Chrysler or Treasury officials later today.

Banks, including J.P Morgan, Citi, Morgan Stanley and Goldman Sachs, had been holding up the deal for weeks, insisting on more cash and equity. But a deal struck with the United Auto Workers Sunday night, said one executive familiar with the negotiations, put additional pressure on the debt holders to strike a deal.

Those banks are holding secured debt. And one of the issues confronting them is that Chrysler’s assets—Jeep, minivans, factories, Dodge Ram pickup and real estate—all have limited value in the recession, and few potential buyers [see Chrysler’s Looming Tag Sale].

The possibility of a Chapter 11 filing is not completely off the table for Chrysler. But it is far less likely.

Chrysler was to have filed a new restructuring plan to the White House auto industry task force by April 30, so that the Obama Administration could determine if Chrysler has restructured its business extensively enough to merit an additional $6 billion in loans on top of $4.5 billion it has already received.

A deal with Fiat is now expected to go forward, with the Italian automaker owning 35% of Chrysler, while the United Auto Workers will own up to 55%, and the Federal government up to 10%.

The Obama Administration has already said that Chrysler’s only viable future was one involving a merger with a stronger company. It’s commitment to the further loans has been contingent on the Fiat deal. And the Fiat deal was contingent on big concessions from the union and bond holders.

The Chrysler deal with bond holders could be a model for a deal at GM, whose restructuring to avoid bankruptcy is also dependent on debt holders taking an enormous “cram-down” on what they are owed. But, while Chrysler’s debt was secured with hard assets, GM has some $28 billion in unsecured debt. And many of those debt holders are insured against losses with credit-default swaps if GM goes into bankruptcy.

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Reader Comments

Rudy Vandenbelt

April 28, 2009 12:53 PM

It will be interesting to see what Ford does now. Certainly they, and the Ford UAW membership will recognize that a serious conflict of interest now exists with the UAW ostensibly representing Ford workers AND concurrently being in direct competition with Ford's auto business.

Grounds for Ford to get a vote to de-list the UAW? A new FAW? Certainly there is a law that prevents this sort of thing?

Interesting conundrum: Is a union that sits at both sides of the table really doing justice to either side? Can that same union still legitimately call itself a union? Isn't this exactly the same situation that was the impetus for workers to organize into unions to begin with?

To quote a certain songwriter/genius who happens to be from the land of the labor movement "Then you will find your servant is your master...And youll be wrapped around my finger"

The car world has gone mad!

Oh and while we are going back in time I'm going out to look for a new bicycle...or maybe a nice horse!

Thom

April 28, 2009 12:56 PM

55% in hands of the union? I thought Detroit crashed because of the union.

bill

April 28, 2009 01:01 PM

do you really think the banks will take a loss on the bonds? hello more TARP funds to the banks, and more service charges, and usury rates of interest. nice, everone footsa the bill now

fbcx

April 28, 2009 01:07 PM

Now it will be interesting to see if a Union run company can survive in the real world. I wish them luck, but the Union is going to have to start acting like an owner instead of an adversary.

Karl

April 28, 2009 01:13 PM

Chrysler has NO SHOT in making it! Even if the bankruptcy is averted, Chrysler's sales will not be there in the years to come. GM will be DOMED too because the Chinese & Indian car-makers will soon have their vehicles available in the USA. Chrysler & GM can R.I.P with AMC. "The times, they are a changin'." - Dylan

KJ

April 28, 2009 01:20 PM

Sounds like AIG is going to be headline news again if they have to pay bondholders.

Seeer

April 28, 2009 02:20 PM

The government shouldn't give Chrysler a dime until the dump the greedy little pig Nardelli who has a proven record of destruction and only made fake numbers at Home Depot from the near death destruction of brand value. He drove of good people, ruined the culture, decimated customer satisfaction and ruined the stock price. A real poster child for everything wrong in corporate America. Any money should be contigent on his departure with absolutely nothing.

Boris

April 28, 2009 02:37 PM

What will be intersting to see is how long will Chrysler last if tehy avert bankruptcy now. In todays market neither Chrysler nor GM have a real chance of long term sustainability. Asian and european car makers have far superior plants, more fuel efficient cars, lower costs and better corporate structure. So instead of wasting our tax money on TARP funds to the banks we need to allow these companies to file for chapter 11 and restructure them from the bottom up without the outrageous existing terms of the UAW. Yes, unemployment will skyrocket, but once the restructured companies are in place the same workers will be given the chance to get back to screwing bolts with a more realistic and reasonable agrrement that will provide the company rather than the workers with long term viability.

Richard

April 28, 2009 02:58 PM

Perhaps giving the UAW 55% control will take some of the animosity out of Detroit. We have a cultural problem in Detroit that is unique to anywhere else in the world. This problem extends from the board room to the youngest child on the playground.

Until a spirit of co-operation begins, the city will never make definitive progress in the work to solve the problems with unity and dignity.

It’s more than cars, trucks & parts. It’s a social problem.

BigD

April 28, 2009 04:19 PM

So then the collector cars become even better investments. No change for Chrysler. Government backed warranties on a Chrysler after bankruptcy wont hurt so badly; after all they are part German.

j

April 28, 2009 04:24 PM

If the UAW ownes a chunk of GM and Chrysler, the UAW will make Ford contracts uncompetitive such that their equity positions gain in value. Double dealing.

BCR

April 28, 2009 04:31 PM

I think the inevitable has simply been averted, at a significant cost. Rudy brings up a good point with the union negotiations with other car companies when they're majority owners of another car company... Lots of conflict there.

m.r.

April 28, 2009 04:40 PM

despite financial aid by Feds, Chrysler needs a winning line-up of product that sells well and is profitable. big task, for sure. that is the key to survival.
otherwise it will be picked up as viable parts and the rest will die. all the Fed men may not be able to put Chrysler together again!

HoseyG

April 28, 2009 05:35 PM

With all the People who never worked in a Auto Factorie you will never no what effect it has or the toll it takes on your body. Then you will never understand the life of an Auto Worker, If we loose are Auto Factories and we have to go to War, Remember Who Build The Tanks & Machinery For Us, It Was Are Auto Factories That Crank These Fighting Machines Out. Now let USA go to War, most likely we will be at War with the one's who now own and run what once was an American Icon. Now lets see if the Tanks & Jeeps and Other Machinery will last on the Battle Field. WE Will Be Fighting With Junk That Reads, NOT MADE IN THE USA, ""GOOD LUCK SEE YOU IN HELL""

jm

April 28, 2009 06:10 PM

chrysler & gm can r.i.p

Dale

April 28, 2009 06:37 PM

LMAO...so how do pay raises, and strikes work when you work for the Union....The biggest laugh, you where paying for it too.....and how much profit will you get

chris

April 28, 2009 06:45 PM

Wow, the union leaders have finally gotten to the endgame. They now own the company they used to do battle with. The first thing the union heads should do is disband the union. Then make all the employees work as contract employees. Hire new middle management and set a new tone in the culture and breathe life back into Crysler. That way, they can become even more rich!!! They have succeeded indeed.

Dale

April 28, 2009 06:55 PM

How do you get raises, or strike when you work for the Union? LOL The best part is, you paid for it.. Will you see any profit, or take a pay cut, and lose of benefits so they can?

Dale

April 28, 2009 07:12 PM

Just so Chrysler, and GM employees know. Your new boss still expects you to pay your union dues. Notice, expect pay, and benefits to be cut. Your new owners now expects the company to make a profit....please deposit all picket signs at the time clock today.

KT

April 28, 2009 07:24 PM

Ha Ha, Seeer, you must be an HD ex-employee. Me too, couldn't agree with you more. Nardelli=swineflu

bill

April 28, 2009 08:49 PM

why would the government want Fiat to be envolved with chrysler. They will not put in any money, won't have a small car for 2 years. What will carry Chrysler until something from Fiat comes along. Also, what guarantee is there that Fiat is the company to join up with. Are they the only one that has shown any interest? Mercedes lost money with Chrysler. Why should it be any different with Fiat?

tt

April 28, 2009 10:08 PM

Karl, Boris, HoseyG - Your comments would be more credible if you could spell and use proper grammar.

Lucile

April 29, 2009 02:42 AM

Chrysler is Massively OverPowered and Respected (MOPAR) again.
No real American would buy a crummy Chinese or Indian car when they can buy a MOPAR.
Let's all go buy a Dodge Challenger SRT-8 today.

mark

April 29, 2009 02:39 PM

The biggest problem in the auto industry is greed. In a contract settled in 1998,I asked,"what will we ask for next contract". The union officals thought for a minute and answered MORE. And the next move was crook Bob Eaton that sold us out to daimler and received 36 million on the sale. And the whole time this crippled up auto worker just did his job. 30yrs and out seemed to be fair. 30yrs and out?

tew

April 29, 2009 07:43 PM

buy a jeep commander and see what junk chrysler has been building! a 2006 commander loaded cost about $40'000 but with 16000 miles it is worth around$17'000 is that fair I don't think so!

Mira's Desk

April 30, 2009 07:42 PM

It's not clear we are getting the entire story about Chrysler's small debt holders. Check out what the Non-Tarp bond holders have to say. http://pfx.me/KI

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Want the straight scoop on the auto industry? Detroit bureau chief David Welch and auto beat veterans David Kiley, Dexter Roberts and Ian Rowley bring daily scoop, keen observations and provocative perspective on the auto business from around the globe. Read their take on such weighty issues as Detroit’s attempt at a comeback, Toyota’s quest for dominance and the search for an efficient car.

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