Chrysler Talks Bogged Down On Issues of Equity for Banks

Posted by: David Kiley on April 14, 2009

The White House auto industry task force and negotiators for Chrysler are asking banks holding some $6.9 billion in secured debt to take just $1 billion as the automaker tries to avert bankruptcy by the end of this month.

But the banks—JP Morgan Chase, Citibank, Goldman Sachs and Morgan Stanley, which hold 75% of the debt—are remaining steadfast in refusing the deal. Their recourse, since their debt is secured by Chrysler assets such as the Jeep brand and factories, is to take their chances in a bankruptcy filing and hope they get a better deal when the assets are sold. Other lien holders include hedge funds—Elliott Management, Stairway Capital Management and Perella Weinberg Partners.

There is risk in that strategy, considering the dire straits of the credit markets and shortage of buyers. Ford has been shopping its Volvo unit for two years without a deal in place yet. GM has been shopping Hummer for more than a year. Thomas Stallkamp, partner in private equity firm Ripplewood Holdings, says it is very difficult to assess real market value for assets like Jeep and Chrysler’s factories. “There is so much over capacity and still a shortage of credit…I don’t think anyone knows how much they would bring in liquidation,” says Stallkamp, who was formerly President of Chrysler before Daimler-Benz bought the automaker in 1998.

That uncertainty and risk is what is driving Cerberus to play hardball with the banks, say analysts watching the deal.

Banks and hedge funds holding the secured debt are looking for some equity in Chrysler for accepting such a haircut on the debt, assuming the automaker forges an alliance with Italian automaker Fiat. That deal is contingent on Chrysler getting a $6 billion government loan, which in turn depends on Chrysler getting a huge concession from its debt holders and the United Auto Workers union by April 30.

If the Chrysler-Fiat alliance is successful, the banks argue, they should be able to share in the success in exchange for taking the sacrifice now.

The UAW is being offered equity in exchange for giving up half the $9 billion Chrysler owes the union’s Voluntary Employee Benefit Association, which administers health care coverage to Chrysler’s workers and retirees.

The union and bond holders at both Chrysler and GM have been in a poker game of sorts, trying to make sure one doesn’t get a better deal than the other.

The proposed deal to save Chrysler now calls for Fiat to get 20% of Chrysler in exchange for the Italian automaker sharing vehicle and engine technology with Chrysler. The barter arrangement has been estimated to be worth $10 billion to $12 billion. After the company repays the federal government $10 billion in loans, the proposed deal says, according to sources familiar with the negotiations, Fiat would be allowed to buy more than an additional 30% of Chrysler—a majority ownership—for around $50 million. “The deal presented to the lenders right now is completely inequitable,” says one representative of a bank on the debt holders committee not authorized to speak on the negotiations.

Based on the terms Fiat is being offered by Chrysler owner Cerberus Capital Management LLC, senior debt holders should be offered at least 25% equity in the company going forward, said the bank official. The White House has already told Cerberus that it should consider its equity in the automaker gone. “There is only so much equity…just so many slices in the pie and that is what is being fought over,” said the same bank representative.

If the Fiat deal goes through, there will likely be substantial management changes at Chrysler, says an executive briefed on the talks. Fiat CEO Sergio Marchionne will likely hold the title of either chairman or CEO of Chrysler. Current chairman and CEO Robert Nardelli, installed by Cerberus in 2007, will likely retire from the position since Cerberus will likely have no equity left in the automaker. Possible roles for vice chairman James Press and vice chairman Tom Lasorda have not been ironed out yet, the same executive said.

If a deal satisfying the White House auto industry task force is not reached by April 30, Chrysler will be forced into bankruptcy without the White House and U.S. Treasury taking an active role by providing Debtor-In-Possession (DIP) financing. Without another source of DIP financing, Chapter 11 bankruptcy would transition to Chapter 7 liquidation, with Jeep and Chrysler’s other assets auctioned off.

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Reader Comments

greg

April 14, 2009 9:48 AM

the Feds should require Steven Feinberg, owner of Cerberus, to put a few billion dollars of his money into Chrysler since he would have made billions if this deal had worked; and maybe it has, he enjoys a free option to the upside and seemingly has Chrysler Financial, which should be taken away from him, as should his interest in GMAC. Enough of these elite financiers winning and never losing.

Mike from NYC

April 14, 2009 10:42 AM

"After the company repays the federal government $10 billion in loans"

Do you really think that Chrysler will only need $US10B from the government? As I see it Chrysler will need a lot more money to continue operations. It will take at least 2 years before any FIAT sourced products hit the pavement and who will cough up the money to keep Chrysler alive in the mean time? The banks? I think they see the writing on the wall and if they have half a brain, will refuse to lend any more money.

Another problem will be the question if Americans will buy FIAT based cars. FIAT did not have a reputation for quality or reliability when they were last sold in the USA almost 30 years ago. In fact, their quality was so bad that they needed to change the name to Bertone and the name FIAT was stricken from the cars.

Would I buy a car from a basically unknown and untested car from a manufacturer with questionable reliability? Hell no.

Trying to keep Chrysler in business is folly. It is throwing GOOD money into a money pit with no certain future.

But hey what the hell do I know, I'm just a long time gear-head with a brain.

uaw 424

April 14, 2009 10:55 AM

the white house should BUTT OUT of all auto business.They can't even run the country properly. They need to mind their own business.They know nothing about the auto industry.

Hugo van Randwyck

April 14, 2009 3:23 PM

There is a really easy way for politcians in Washington to help - speed up the fall in house prices and rents, so people have more money to spend!:) What is the pay and pension difference between Chrysler and the transplants? Is it 20%, 30% , 40%? Whatever it is, let's say 30%, why not say to employees/retirees, we are reducing payments by the amount above the transplants, when Chrysler is profitable, e.g. 2% you get 5% restored, at 4%, you get 10% restored, etc. That would mean, that there could be an immediate saving - especially in management/salary pay/pensions - and a realistic cost base, for breaking even and being profitable. Better than Chapter 11. The FIAT link up, would be a nice extra.

Ben

April 14, 2009 4:15 PM

Hey UAW 424 - we would love for our tax money to not be wasted on the auto industry, but you guys came groveling to Washington for loans because you can't build a car that consumers want to purchase and are paying high school dropouts that snap in a cupholder more than the college-educated workforce. You invited the White House in as soon as you wanted a handout, and the UAW is a big part of the problem. Time to stop milking the cow and get ready for a dose of the real world.

NostraChronus

April 14, 2009 4:27 PM

maybe Obama can pay off the debt with tax dollars, thereby funneling more of our hard-earned money to insolvent banks.

steverino

April 14, 2009 5:01 PM

The banks should not worry about taking a "haircut", the government will make it up to them with a few billion in TARP money

Mike

April 14, 2009 6:12 PM

Well, the White House does know one thing about the auto industry....most of it is going bankrupt and getting liquidated without Federal Funding/Help.

Then again UAW 424...could they possibly screw it up worse then it already is? I doubt it.

Gear head

April 14, 2009 8:40 PM

If we dont save chrysler are auto industry is doom!! Dummy We need to manufactor are own goods!!!!!!!!Dummies!!! Let walls street go under they dont make anything!!!!!!!!Fait is a great company mIKE FROM THE DUMP NYC Go buy a honda loser!!!

CALcars

April 14, 2009 8:47 PM

Chrysler cannot stand alone. The Fiat deal is the only one possible. Any other maker with a presence in the US will only cannabalize it's own sales and already has excess capacity. Great synergy for Fiat with Jeeps and Rams to sell worldwide. Fiats, Alfas and maybe Lancias to build in empty plants and sell in the established Chrysler dealership system. Some could be here as early as next year. Also, the US could be exporting Fiats and Alfas as it is now cheaper to make them here than in Europe with the exchange rate on the Euro.
MB was never a good match as MB competed in the same market segments and already had an extensive dealership and distribution system. So, no rebadged products. Also, MB was not willing to share its good technology, so Chrysler did not gain anything. Fiat on the other hand wants that dealership network and distribution system and is willing to invest its best technology. Do not underestimate the billions of dollars of value in the designs, research and patents that Fiat has in motors, drivetrains and production technologies. For a broke company like Chrysler with no money to spend on those, they are invaluable.
Sorry to disillusion you Mike, but today's Fiats, Lancias and Alfas are not the problem cars that you remember. Also, a bit of history here, Fiat ended production of the 124 and the X19, but Bertone, the coach builder wanted to continue selling the profitable X19s in the US so they continued to build them and sell them as Bertones. Pininfarina did the same with the profitable 124 Spider.
They need to turn over the top management as Chrysler management has proven a failure. Chrysler management has shown that it knows nothing about the auto business.
If the deal does not go through, the company will go into bankruptcy. The greedy banks that have secured loans will have first recourse and get pennies on the dollar when it gets chopped up and liquidated. However, the UAW, the other unsecured banks and the US Government will lose everything as there will be nothing left over. The US has to make this deal come to pass as the loss of jobs for Chrysler and it upline and downlines will be huge as will the loss of an industry. The greedy banks that have already taken Bailout money need to stop playing their scorched earth blackmail game. Make them pass on some of that bailout money that they are sitting on.
By the way, Fiat is in the driver's seat here. They may make out better if the deal falls through and they let Chrysler go into bankruptcy. Fiat can then pick up only what they want when it gets liquidated. Like Jeep production, distribution and dealerships. The only other buyers would be someone not already in the US truck market.
I think the White House knows this scenario and will push hard to make the deal happen to preserve American jobs and industry.

Bill Couture

April 14, 2009 11:34 PM

If the big banks are the holdouts then they should be forced to deal, at gun point if necessary.

Ballbuster

April 15, 2009 3:33 AM

Regarding Nadelli's involuntary retirement: I have a poultry business in need of a ex-butcher with latrine work experience. Without much suggestion, Nadelli's name immediately comes to mind; he should file a job application at once. The job description: must not talk from the four corners of his mouth; no gas belching masqueraded as communication; no claim of telling the truth since nobody believe his nonsense. If Nadelli offers me the $2.99/gal gasoline rebate gimmick, I'll definitely hire him for his future clever bag of tricks.

GG

April 15, 2009 8:42 AM

Greg: if that's the case, then why shouldn't the shareholders in GM have to do the same? Collectively they too would have "made billions" if GM had succeeded.

Whether a company is privately or public traded doesn't matter, the owners have already put up the money to buy the shares they own. Cerberus isn't doing so well, since most of their properties are underwater right now.

John

April 15, 2009 9:24 AM

Regarding the UAW 424 comment: YGBSM! You're going to blame the government? Organized labor has driven a stake into the heart American manufacturing, and together with the greed of corporate executives, has successfully brought the entire US economy to it's knees. Congratulations. I think the middle class is ready for another "incumbents out" movement...and this time it's you!

dynodon

April 15, 2009 2:42 PM

How can you slam the UAW ? the deal that we have was negoiated like all union agreements ....greedy management and bad mergers in the past screwed Chrysler up....not the workers ...we don't design, we build ....has every one forgoten the early pay off we did back in the 80's from another successful loan ....it is a loan ....no Free government hand out.....wake up you arm chair quarterbacks

bossman12345

April 17, 2009 7:39 PM

I love to read the comments some people who have no idea of what they are taking about concerning Chrysler and Fiat or any other company. I spent 43 years with Chrysler and busted my butt when most of these commentors were still in diapers. The point being is we USA don't want any of the companies to go under. Do we Americans?

helen

April 20, 2009 2:10 AM


The banks should take what they can get now because they'll actually get less when they try to sell Chrysler's pieces.

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