Chrysler Files for Bankruptcy

The historic move hinges on a fast trip through court, billions more federal dollars, and an alliance with Fiat

By David Kiley and David Welch

Unable to get all of Chrysler's creditors on board with a restructuring of its debt, the automaker and the U.S. Treasury Dept. put the company into bankruptcy today, Apr. 30. President Barack Obama, in a White House statement delivered shortly after noon ET, said the Administration supported a bankruptcy filing and lambasted a group of Chrysler bondholders who held out for better terms.

Obama said the bankruptcy process will be "quick and efficient," and reassured car buyers that the government will back any new car warranties. The Treasury will provide financing for the company while it is in bankruptcy and pave the way for the automaker to reemerge from the process as a smaller, leaner company with Italian automaker Fiat (FIA.MI) as a major shareholder.

Obama said that while major bondholders agreed to take one-third of what they owed, and the unions agreed to pay and benefit cuts, a "group of investment firms and hedge funds continued to hold out for a taxpayer bailout." Obama described them as a "small group of speculators" and said the Chapter 11 process is "designed to deal with the last few holdouts."

In a statement published on The Wall Street Journal Web site, the recalcitrant bondholders said they sought an accommodation with the government.

"Under long recognized legal and business principles, junior creditors are ordinarily not entitled to anything until senior secured creditors like our investors are repaid in full. Nevertheless, to facilitate Chrysler's rehabilitation, we offered to take a 40% haircut even though some groups lower down in the legal priority chain in Chrysler debt were being given recoveries of up to 50% or more and being allowed to take out billions of dollars. In contrast, over at General Motors, senior secured lenders are being left unimpaired with 100% recoveries, while even GM's unsecured bondholders are receiving a far better recovery than we are as Chrysler's first lien secured lenders," the group said.

The statement added: "Our offer has been flatly rejected or ignored. The fact is, in this process and in its earnest effort to ensure the survival of Chrysler and the well-being of the company's employees, the government has risked overturning the rule of law and practices that have governed our world-leading bankruptcy code for decades."

Chrysler CEO Robert Nardelli, who will be leaving the company after the transition, said on CNBC that the Chapter 11 filing is "a bittersweet conclusion." He added, "I think breathing new life into Chrysler is what it's all about."

The bankruptcy filing would be the first in U.S. history by a major automaker. It will come after Chrysler in recent days had struck major deals for concessions from its unions and most of its bondholders, made up of large banks and hedge funds. A Chrysler bankruptcy could even be a shot across the bow to bondholders in General Motors, which is also headed toward bankruptcy if it cannot get its unsecured creditors to take stock in exchange for most of their $27 billion in bonds.

The sticking point on Wednesday—the last day before the White House's 11:59 p.m. Thursday deadline for a "financial viability" plan that would earn Chrysler additional government loans to stay in business—was a group of smaller banks and hedge funds that refused to take substantial writedowns, known as a "haircut" or "cramdown," on the value of their bonds.

Treasury even sweetened the deal, offering $2.25 billion for the $6.9 billion in debt instead of the original $2 billion. About 75% of the creditors agreed, but a few hedge funds held out.

The bondholders could be playing a poker game in which they are hoping to use legal tactics to stall bankruptcy proceedings and get the agreeable creditors—namely JPMorgan Chase (JPM), Morgan Stanley (MS), Citigroup (C), and Goldman Sachs (GS)—to offer them more or buy their debt. Douglas Bernstein, a bankruptcy attorney at the firm of Plunkett Cooney in Bloomfield Hills, Mich., says that's the only way to get more money than waiting on a judge's decision. "It is highly doubtful that these bondholders would do better in an actual Chapter 11 filing than by cutting a deal," says Bernstein.

Late Wednesday, Administration officials and the President held out hope that they could strike a deal. During Wednesday's prime-time press conference at the White House, President Obama appeared to point to a Chrysler bankruptcy filing, although he said it was "not yet clear" Chrysler would have to move forward with one. "I am actually very hopeful, more hopeful than I was 30 days ago, that we can see a resolution that maintains a viable Chrysler automobile company out there." He added: "The fact that the major debt holders appear ready to make concessions means that even if they ended up having to go through some sort of bankruptcy, it would be a very quick type of bankruptcy."

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